posted July 6, 2020
Why 3rd Quarter US Economic ‘Rebound’ Will Falter

Eric, here’s a submission for you for next issue of Z mag. Jack

Why 3rd Quarter US Economic ‘Rebound’ Will Falter
By
Dr. Jack Rasmus
Copyright 2020
The reopening of the US economy in June—and some states as early as May—has produced a modest economic ‘rebound’. But rebound is not to be confused with economic recovery.

The current rebound is the natural result of the US economy collapsing 40% between March and June 2020. In the first quarter, January-March 2020, the US economy contracted 5%, virtually all of that in March. While the final data for the 2nd quarter is yet to be announced, the US Federal Reserve Bank’s forecasts of US Gross Domestic Product (GDP) show a much greater collapse, ranging from -30.5% (NY Fed district) to -41.7% (Atlanta Fed district). No economy can continue to collapse at that steep a rate quarter after quarter.

Economies experiencing deep and rapid contractions—which is typical of both great recessions and economic depressions—inevitably experience periods of leveling off for a time, or even a slight bounce back—i.e. a rebound. But that’s not a recovery. ‘Recovery’ means a sustained, quarter to subsequent quarter economic growth that a continues more or less unabated until the lost economic ground is ‘recovered’. But a rebound is typically temporary, followed by subsequent economic relapses in the form of stagnant growth or even second or third dip recessions.

Look at the Great Recession 1.0 that began in December 2007. The decline began that month subsequently declined more rapidly in the first quarter 2008, but then bounced back slightly in the 2nd quarter 2008. It then took a deep dive in the second half of 2008 through the first half of 2009, contracting every quarter for an entire year. A short, shallow recovery followed into 2010. But the economy relapsed again in 2011, contracting once more for two quarters in 2011. Another small rebound followed in early 2012 and was followed by stagnation in the second half of 2012.

The reported GDP numbers after 2008 were even weaker, and the relapses more pronounced, before the US Commerce Dept. changed the way it defined US GDP and boosted the totals by $500 billion a year after 2013, retroactive to 2008 and before.

All Great Recessions with an initial deep economic contraction, are typically followed by brief shallow recoveries, cut short by subsequent double dips or quarters of no growth stagnation.
That was true of the Great Recession of 2008-09, which didn’t really end in June 2009, but bounced along the bottom economically for several more years. A similar trajectory will almost certainly follow today’s 2020 Great Recession 2.0 now concluding its Phase One initial deep collapse.

The Phase One deep collapse is now giving way to its Phase Two and what will prove a brief and quite modest ‘rebound’. But that’s not a recovery.

Further economic relapses are inevitable after ‘short, shallow rebounds’ that characterize all Great Recessions. That trajectory—i.e. short, shallow rebounds followed by relapses also brief and moderate can go on for years.

What it means is there will be no V-shape and true recovery in the US economy in the second half of 2020. What there will be is an extended ‘W-shape’ period, the next two years 2020-2022 at minimum. And it may continue for perhaps even longer.

The 1929-30 Great Recession: Anteroom to 1930s Depression

A similar scenario occurs prior to bona fide economic depressions, like that which occurred in the 1930s. The great depression began initially as a Great Recession. US policy makers failed to contain it and it slipped into the Great Depression of that decade as we know it. What precipitates Great Recessions collapsing into bona fide Depressions is the collapse of the financial and banking system.

The Great Depression of the 1930s did not begin with the stock market crash of October 1929, however. The real economy was already slipping into recession in manufacturing and construction sectors in 1929, well before the October 1929 stock market financial crash. The economy contracted in 1930 by -8.5% and continued to contract every year thereafter through mid-1933 as the US economy experienced a series of four banking crashes, one each year from 1930 through 1933. The banking crashes drove the real, non-financial economy ever deeper every year, in a ratchet like effect.

Rebound and growth followed 1934-36. However, that weakened significantly in late 1937 as a conservative Republican Congress and Supreme Court together began dismantling Roosevelt’s 1935-37 New Deal social spending fiscal stimulus programs. As a result, in 1938 the US economy fell back into depression once again. A partial reversing of the dismantling in 1939 produced a return to positive GDP growth that year. But it wasn’t really until 1941-42 that the economy really exited the Great Depression, as US GDP rose 17.7% in 1941 and then 18.9% in 1942. Recovery—not rebound—was clearly underway after m id-1940—i.e. the result of government spending on both social programs and defense that amounted to more than 40% of GDP those years. That was fiscal stimulus. That was recovery.

In other words, the lesson of the Great Depression of the 1930s is in order to end a depression, or stop a Great Recession from becoming a Depression, the government must step in and spend at a rate of 40% GDP.

Prior to the onset of the current 2020 Great Recession 2.0, the US government’s spending and share of US GDP was about 20%. It needs to double to 40% to engineer a true recovery from the current crisis. 5.5% is no stimulus in fact; just a partial ‘mitigation’ of the severe collapse that just occurred. That is, a temporary floor under the deep 30%-40% collapse that would have been even greater.

The 2008-09 Great Recession: The 5.5% Failed Stimulus

In January 2009 the incoming Obama administration proposed a fiscal stimulus recovery package amounting to roughly $787 billion and 5.5% of GDP. Economists advocated double that. Even Democrat party leaders in the US House proposed another $120 billion in consumer tax cuts. But Obama’s economic advisers, mostly former bankers and pro-banker academics like Larry Summers, argued the US could not spend that much. Obama listened to Summers and reduced the amount to the $787 billion. It proved grossly insufficient. The real economy continued to lag and job losses continued to mount. Supplemental programs like ‘cash for clunkers’ and ‘first time homebuyers’ had to be added.

Even with these post-January program supplemental spending Obama’s fiscal stimulus proved insufficient to generate a robust recovery, as the historical record shows. The US recession under Obama ‘recovered’ at its weakest rate compared to all the prior ten US post-recession recoveries since 1947. The Obama recovery was only 60% of normal for recession recoveries.

The problem with the Obama 5.5% was not only the insufficient magnitude of the stimulus. Its composition was deficient as well. It called for almost $300 billion of the $787 billion in mostly business tax cuts, which were then hoarded by business and not invested to expand output, hire more workers, and generate thereby more income for consumption. Nearly $300 more was in the form of grants given to the states to spend. They too hoarded most of it and failed to rehire the unemployed as was intended. The remainder of the $787 billion was composed mostly of long term infrastructure investment and spending that had little initial effect on the economy’s recovery. As a result of the insufficient magnitude and poor composition of the Obama 2009 stimulus, the US economy fell into a ‘stop-go, W-shape economic recovery for the next six years. US jobs lost in 2008-09 were not recovered until as late as 2015, and the average wages paid for the new jobs was significantly less than wages paid for the jobs that were lost.

The point is: if 5.5% was insufficient to generate sustained recovery in 2009, today in 2020 the effective 5.5% fiscal spending produced by the CARES ACT in March 2020 will prove even less successful. The US economy’s economic collapse today is five times deeper than in 2008-09 and has occurred in one-fifth the time of the 2008-09 event. If a second more aggressive government spending program does not follow in the second half of 2020, then the current tepid economic ‘rebound’ underway due to the reopening of the US economy will certainly fail at generating a sustained recovery. Here’s why the CARES ACT—the main and only stimulus program to date—is only 5.5% and will fail to generate a sustained recovery as the economy reopens with a modest ‘rebound’.

The March 2020 CARES ACT: Failed Stimulus Déjà vu

As of mid-year 2020 the US government spending to date is summed up in the various provisions of the CARES ACT passed by Congress in March 2020, plus several smaller measures passed before and after it as supplements. Its actual spending as of late June 2020 amounts to only approximately a 5.5% contribution to US GDP.

The CARES ACT on paper called for $1.45 trillion in loans and grants to small, medium and large businesses. $500 billion is allocated as loans to large corporations. Another $600 billion to medium sized plus some other measures. And $350 billion in loans, convertible to grants, to small businesses called the Payroll Protection Program, or PPP.

Another $310 billion was added to the PPP small business loan program as banks quickly misdirected hundreds of billions of dollars to many of their ineligible bigger business prime customers which scooped up much of the original $350 billion for small business.

The three business programs combined thus allocated $1.76 trillion in loans and grants.

Another $500 billion was allocated to workers and US households in the form of supplemental income checks of $1200 per adult plus an extra $600 in federal unemployment benefits available through July 31, 2020.

A couple hundred billion dollars more went to hospitals and health care providers in emergency reimbursements before and after the March CARES ACT passage.

That brought the total March CARES ACT fiscal stimulus to roughly $2.3 trillion. However, not discussed much in the media is another $650 billion CARES ACT provided business and investor tax cuts. The tax cuts include a temporary suspension of business payments to the payroll tax; more generous net operating loss (NOL) corporate tax averaging that allows business to use current losses to get tax refunds on prior year taxes paid; faster depreciation write-offs ( de facto tax cut); and more generous business expense deductions. Less than 3% of the $650 billion tax cuts in the CARES ACT went to families earning less than $100,000 per year in annual income.

On paper, the roughly $2.3 trillion CARES ACT amounted to roughly 11% of GDP. But only half of that 11%–or just 5.5—has actually hit the US economy. This contrasts with Germany and other European and Asian countries that boosted fiscal spending stimulus by as much as 15%-20%.

Another 5.5% Stimulus Means Another Failed Sustained Recovery

The 5.5% to not enough to kick start the rebound into a sustained recovery. Much of the 5.5% is already spent to mitigate the 2nd quarter deep contraction and is no longer available as a stimulus in the upcoming 3rd quarter.

All the $1200 checks have been spent already and most of the $600 unemployment benefit boost has entered the economy. The latter expires on July 31. Furthermore, the majority of the $1.7 trillion allocated to businesses large and small has yet to get into the US economy as well.

Of the $660 billion in the small business PPP program, about $520 billion has been spent. Less than $100 billion of the $500 allocated to large businesses, like airlines and defense companies, has actually been ‘borrowed’ by big business. And as mid-June 2020, none of the $600 billion for medium size businesses had yet been ‘taken up’ by those businesses. The program was only fully launched late June, more than three months after it was first announced in March.

Thus far little interest appears on the part of medium and large businesses in the more than $1 trillion loans allocated to them. And as far as the $650 billion in tax cuts is concerned, its effects can be delayed until December 31, 2020, if even then. Given the weak US economy and consumer demand, many businesses will take the tax cuts and hoard them.

In short, more than half the roughly $3 trillion total of government spending, loans, grants and tax cuts provided by the CARES ACT is yet to be committed to the US economy. The official 11% is really only half that at best.

This fact leads to the interesting question: Why have medium and large businesses not take up more of the $1.1 trillion business loans allocated to them?

The $3+ Trillion Uncommitted Business Cash Hoard

The answer is they haven’t because they are already bloated with cash and don’t need or want it. That cash hoard has resulted from several sources in recent months: Large corporations saw the writing on the wall with regard to the virus as early as January-February 2020. They quickly began loading up on cash by drawing down their generous loan credit lines with their banks. That produced a couple hundred billion dollars in cash by March. Then they issued record levels of new corporate bonds to raise still more cash. From March to end of May more than $1.3 trillion in new corporate investment grade bonds was raised by the Fortune 500 US businesses—i.e. more than in all 2019. A couple hundred billion dollars more was raised in junk grade corporate bonds.

Still another cash source was raised by businesses suspending dividend payments and stock buybacks to shareholders. In 2019 they distributed $1.3 trillion in buybacks and dividend payouts
($3.4 trillion total under Trump’s first three years in office). So buybacks and dividends suspensions saved at least another $500 billion in cash. Companies also began selling off and cashing in their minority stock interests in other companies. Furloughing workers to work from home also saved still more cash in reduced facilities, benefits and related costs for many corporations. Tech companies especially benefited from this.

Bloated with trillions of dollars of cash, large and medium sized corporations had little interest in borrowing from the CARES ACT, since the latter came with conditions like the provision that 70% of the loans be spent on keeping workers on their payrolls. They preferred to lay off their workers, and borrow from the credit markets, issue new bonds, and otherwise conserve cash.
A good example was Boeing Corporation. Congress allocated more than $50 billion to Boeing as part of the $500 billion loan program earmarked for large corporations. Instead of borrowing that, Boeing raised $25 billion issuing new bonds and announced layoffs of 16,000 of its workers! Less than $100 billion has been used to date by large corporations under the CARES ACT big corporations’ $500 billion loan allocation. And virtually nothing of the $600 billion to date allocated under the medium size business loan program called the ‘Main St.’ lending facility.

7 More Reasons Why ‘Rebound’ Won’t Mean Recovery

Here are some seven other reasons—apart from the US current insufficient fiscal stimulus—why the US economy will not experience a sustained ‘recovery’ in the next six months, and why instead the US will follow a W-Shape trajectory of weak un-sustained growth followed by economic relapses through 2020-21 (and perhaps even longer):

1.) 2nd Covid-19 Wave Economic Impact:

It is inevitable a number of states will reinstate shutdowns—in significant part if not totally—as the infection, hospitalization, and death rates rise over the summer due to premature reopening of the economy and a growing breakdown of social discipline in adhering to basic precautions like social distancing and mask wearing. The partial shutdowns will. To varying degrees, reduce consumer spending, business investment, and result in re-layoffs of workers. Second wave layoffs in services like leisure & hospitality, bars, restaurants, travel, public entertainment, and even education and health care services will emerge—all negatively impacting household consumption demand. It is estimated that at least half of the states, 40% of the reopened economy, will reinstate some degree of re-closures of business activity in coming weeks and months as a resurgence of Covid 19 impacts the US economy in the second half of 2020 and beyond.

The official US June employment report on July 3, 2020 showed 4.8 million jobs were reinstated. But no less than 3 million of that 4.8 million were recalls in leisure & hospitality, hotels, bars, restaurants, and retail industries. These are the same industries that will be affected most by states reinstituting shutdowns. They are also industries where businesses that have been able to reopen only partially thus far in most cases operate on very thin margins. They are likely to fail in Phase Two of the crisis now beginning, and many closing completely in the second half of 2020 as a result of operating only at half capacity.

The scope of the possible closures is revealed by the recent Yelp survey of 175,000 of its customer business base. During the 2nd quarter, Yelp’s survey found that in May-June only 30,000 of its 175,000 had reopened. More important, its survey showed that 40,000 of its 145,000 that hadn’t yet opened had already closed permanently. The wave of permanent business closures in the second half of 2020—especially in the leisure & hospitality and retail industries—should not be underestimated. The permanent shutdowns will occur not only due to reduced consumer demand, but to a resurgence of Covid-19 and a second wave of layoffs.

2.) Deeply Entrenched Business & Consumer Negative Expectations

The US economy has been deeply wounded by the deep contraction of the past four months. Both businesses and consumers have negative expectations as to the direction of the economy in the short to intermediate run. Businesses don’t see the conditions for returning to expanding investment, or even returning to prior levels of production and output. With consumer demand clearly in retreat, business expectations of future sales and profits are dampened. Reducing the cost of investing by lowering business taxes or interest rates have little effect on generating more investment, when expectations of profitability—which is what really drives investment—are so low. This is the fundamental reason why business across the board is hoarding its accumulated cash. The same applies to consumers and households. They too are hoarding what cash they have available, spending mostly on necessities only. The evidence is the sharp rise in the household savings rate and bank deposit rates. As much cash is saved and deposited as a precaution that economic conditions may worsen, instead of actually spent. The result is only minimal increase in spending occurs, just as minimal investment. Until negative expectations are somehow reversed, both business investment and household consumption do not rise to levels that result in sustained ‘recovery’.

It will take a major event to again shift business and consumer negative expectations, like a vaccine for the virus or a major fiscal stimulus or a program of mass hiring of the unemployed by government. However, none of the above is on the immediate horizon. Therefore negative expectations will continue to dampen any sustained recovery and limit whatever insufficient government fiscal stimulus to generating a modest ‘rebound’ at best.

3.) Business Cost Cutting & Permanent Layoffs

The deep and rapid rate of contraction of the economy over the past four months, and the business expectation of weak recovery, has convinced many businesses to make many of the cost cutting moves of recent months permanent. An example is how some industries and businesses moved their workforces to work from home. It has saved them significant costs of operation—on facilities, maintenance, and some employee benefits. In recessions businesses always find new ways to cut costs that often result in more layoffs and lower wages. Another phenomenon is rehiring and recalling workers back to work temporarily laid off does not occur en masse and all at once. The typical business practice is to recall only part of their workforce and to recall workers more on a part time basis. Not least, the cost cutting and the part time recalls typically results in businesses leaving part of their furloughed work force behind, whose unemployment then becomes permanent.

This second wave of jobless is already beginning to emerge, as businesses downsize in employment after the initial shock to the economy that has already occurred. Airlines are announcing tens of thousands of layoffs. Several other industries are experiencing growing defaults on debt payments and bankruptcies that will result in mass layoffs as well. For example, the oil & energy sector which was a major source of new job creation during the fracking boom of the past five years. More than 200 defaults of companies are in progress. Layoffs are beginning, of a permanent nature not just temporary furloughs or layoffs.

Cost cutting and layoffs translate into less household income for consumption and therefore for generating a sustained recovery.

4.) Deeper Global Recession & Global Trade Crisis

The collapse of the US economy in the first half of 2020 has been accompanied by a synchronized contraction of the global economy. Global economic contraction means US production for export does not recover much in the short run. Offshore demand for US goods & services remains weak. That in turn dampens domestic US investment, employment, and therefore business-consumer spending. Although the US economy is relatively less dependent on exports to stimulate economic growth, exports are not an insignificant contributing factor to US growth and recovery.

More than 90% of the world economy has also experienced deep recession in the first half of 2020. That compares with the first Great Recession of 2008-09 when a fewer 60% of countries were in recession along with the US. Foreign demand for US exports is thus even weaker this time around. Post 2009 China and emerging market economies boomed after 2010 and put a partial floor under US economic contraction by stimulating demand for US product exports; that China-Emerging Market economies stimulus effect on the US economy no longer exists in 2020.

5.) Intensifying US Political Instability

One should not underestimate the potential growing political instability in the USA in the second half of 2020. This instability will occur on two ‘fronts’. One is at the level of political institutions. It is likely the upcoming national elections on November 3, 2020 will be challenged and not accepted by either Trump or the Democratic Party nominee. The growing social instability in the USA and Covid 19 effects on voter turnout, combined with the already widespread voter suppression in various states, makes for ripe conditions for post-electoral crisis should the election be narrowly decided by voters in November. Evidence is growing, moreover, that Trump is prepared to declare voting by mail as fraud and use that as an excuse to throw the election into the Supreme Court—as occurred in the US in 2000. Today Trump, unlike George W. Bush in 2000, enjoys an even firmer majority in the US Supreme Court.

The instability at the level of political institutions in the USA today is accompanied by what appears as growing grass roots civilian conflicts. Street level confrontations between Trump supporters and rising popular movements and demonstrations are not beyond the realm of possibility, perhaps even likelihood.

The political instability has significant potential to negatively impact both consumer and business expectations and therefore dampen both business investment and household consumption even further in addition to causes already noted.

6.) Wild Card #1: Financial Crisis 2021

Intermediate term, in 2021 likely more than in 2020, is the wild card of a financial system crisis emerging that would exacerbate the real economy’s faltering recovery still further. This channel by which a financial crisis might emerge is a growing wave of corporate and state & local government defaults. Massive excess debt has built up over the past decade in business sectors in the US. More than $10 trillion in corporate bond debt exists at present. At least $5 trillion in corporate junk bonds and virtual junk like BBB investment grade. Still more for corporate ‘junk’ leveraged loans. A protracted period of recession and weak recovery will generate a major potential for corporate defaults and bankruptcies. If the magnitude and rate of defaults is too great, or comes too fast, the banking system could very well experience a major credit crash once again.

Industries highly unstable with high cost unaffordable debt, and with insufficient revenues with which to service that debt, include: oil fracking and coal, big box retail, smaller regional airlines, rental car and other travel related companies, hotels and resorts, malls, commercial property in general, and hundreds of thousands of small restaurants and regional restaurant chains. Defaults have already begun rising rapidly in many. Household debt and state and local government debt finds itself in much of a similar situation—highly leveraged with debt amidst collapsing incomes to service the debt as unemployment and wage incomes continue to decline and as tax revenues remain depressed long term due to the weak economic recovery.

The US central bank, the Federal Reserve, is in the midst of an historic experiment to pre-bail out non-bank corporations to forestall the defaults and to flood, at the same time, the US banking system with massive excess liquidity with which to manage the defaults should they come excessively and too rapidly. It remains to be seen whether the Fed’s massive liquidity injections thus far ($3 trillion), and promised (unlimited), will prove sufficient to manage the defaults. If not, the US banking system will freeze up as financial institutions begin to crash as well with the transfer of defaulted corporate debt on to their own bank balance sheets.

In 2008-09 it was the banking system that collapsed first and in turn precipitated a deeper and faster contraction of the real economy in the US. Today it is quite possible the reverse causation may occur in the Great Recession of 2020. But it matters not in a Great Recession which precipitates which first—i.e. the banking system the real economy or vice-versa. The key point is that both cycles—financial and real—feed back on the other in a Great Recession and amplify the downturn in both.

7.) Wild Card #2: Artificial Intelligence Faster Rollout

Another wild card that may emerge with fuller force longer term is the penetration of Artificial Intelligence in business operations. McKinsey Consultants estimated that by 2025 AI would accelerate in its penetration of business practices. By the latter half of the 2020s decade it would have deep and widespread impact on employment and wages, as AI led to deep cost cutting by business. As much as 30% of occupations would be seriously impacted. The essence of AI is to eliminate simple decision making jobs, in services as well as manufacturing.

But it is highly possible that AI will now penetrate even faster, accelerated by business cost cutting and productivity enhancing drives, as a consequence of the current deep economic crisis. The deeper and more protracted the current recession, the more likely business will engage in multiple ways to reduce costs as a means to weather the crisis. AI offers businesses a prime opportunity to do just that. But AI also means a significant reduction in net jobs, especially simple low paid service and retail work. And with the net jobs and wage loss come reduced consumer household demand, consumption, and therefore sustainable economic recovery.

The Case for 40% Government Share of GDP

As previously noted, recoveries from great recessions and depressions require at least a 40% US government spending share of total GDP. Obama’s raised the US government share of GDP to barely 25%, not 40%. The economy accordingly struggled after 2009.

The current 2nd Great Recession 2020, the first phase of which has just concluded in June, is following the same rough trajectory and scenario as the 2008-09. There has been only token fiscal stimulus to the economy thus far from the CARES ACT. Indeed, Congress never considered, at least in the House of Representatives, the CARES ACT was a stimulus bill. It was called a ‘mitigation’ bill, designed to put a partial floor under the collapse of the economy going on at the time in the 2nd quarter 2020. A true stimulus bill was to follow. That’s the HEROES ACT now blocked in Congress by Republican Senate and Trump. What the latter want is to end the unemployment benefits and provide no further income supplement payments. They want to exchange further unemployment benefits for direct wage subsidies to businesses. They want even more tax cuts for business—permanent payroll tax cuts, more capital gains tax cuts, and more business expense deductions. And they are reluctant to provide funding support for state and local governments with accelerating deficits as a result of tax revenue collapse. Should support for state and local governments not occur soon, it is likely mass layoffs will emerge in states and local governments soon.

However, it does not appear so far that anything resembling a real stimulus will get passed with the HEROES Act. The unemployment benefits extension will likely be eliminated. More business tax cuts, should they be added to the $650 billion provided by the CARES ACT, will be hoarded in large part. As will corporate income that would have been otherwise used to pay wages, as the government pays the wages of their workers instead.

An insufficient fiscal stimulus from an eventual HEROES Act, should it occur, will ensure the current tepid ‘rebound’ of the US economy will fail to evolve into a sustained recovery of the US economy. The seven other, additional factors noted above will further prevent a sustained recovery—and indeed may precipitate a subsequent further serious economic contraction. The summer of 2020 is thus a critical juncture period for the US economy.

The US is currently experiencing what might be called a ‘triple crisis’. A health crisis that shows little sign of abating. A deep economic crisis that is still in its early phases. And a ripening political crisis. Never before in its history have three such major events converged. The one of the three that is potentially most manageable is the economic. Health crisis depends heavily on the development of a vaccine. Not much can be done to prevent a deepening political crisis. It will run its course, whatever that may be. But a government fiscal stimulus equivalent to about 40% of US GDP would very likely stabilize the economy and set it on a path to sustained recovery. However, it is highly unlikely that in the current political climate of instability, deep splits within the US political elites, growing grass roots social confrontations, and failure to mount an effective strategy to address the Covid-19 health crisis that the capitalists and their political representatives will be capable of introducing the necessary 40% war time economic stimulus.

Dr. Jack Rasmus
July 6, 2020

Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He hosts the weekly radio show, Alternative Visions, blogs at jackrasmus.com. His twitter handle is @drjackrasmus and his website: http://kyklosproductions.com.

posted June 17, 2020
2nd Covid-19 Wave and the US Ecnoomy

Over the past week evidence keeps growing that the US has entered a second wave of the Coronavirus pandemic. More than 117,000 Americans thus far have died in just the past three months and more than 2.1 million have been infected. That compares to roughly 460,000 and 7.6 million worldwide. With roughly 5% of the world’s population, the US has about 25% of the world’s virus cases—a testimony to the abject failure of the US thus far to manage the virus.

That failure is perhaps most evident in Trump’s virtual withdrawal from the ‘war’ on the virus and what appears to be his new strategy of letting the states each deal with it as they may and can. Trump’s government is clearly in retreat, concerned only with one thing: to get Trump re-elected no matter what the cost in lives or economic well-being of American citizens.

Trump’s policy boils down to this: totally reopen the economy now, blame the states, World Health Organization and the Chinese for the crisis, declare the rising numbers of infections, hospitalizations, etc. as ‘fake news’, blame a 2nd wave on increased testing, and hold daily mass political rallies from now until November.

Trump is a phony ‘war’ president who long ago dropped his rifle and fled from the field of battle. It’s as if president Franklin Roosevelt on December 8, 1941 left town to sail down the Potomac river on his yacht to contemplate the December 7 Japanese attack on Pearl Harbor, Hawaii—instead of appearing before Congress, as he did on December 8, 1941, to declare war on Japan and rally the country in an all out effort. Roosevelt immediately announced a comprehensive ‘war production act’ to take effect across the entire US economy in just a few weeks. His first executive order was to develop and mass produce penicillin, which was thought impossible but which the US did within just a few months. In contrast, what we got from Trump was a declaration the virus a hoax, a proposal for a bogus hydroxychloroquin treatment that the CDC has since declared dangerous and likely to cause heart attacks, and a public announcement it would all be over by Easter. And today, even more incredibly, Trump has said the virus would go away if we just didn’t test for it so much.

Trump’s only concern is to hold rallies with his conservative red state base that will exacerbate the contagion effect of the virus. As President of only the 30% (his base), he is little concerned about the country at large or the virus ‘war’ that has already killed more Americans than every US war together since 1945. Trump’s only actual order after he announced the activation of the war production act months ago has been to force meatpacking workers back to work else their forfeit unemployment benefits. Work or die! will be the legacy of Trump as a war president!

Trump’s economic legacy, history will also eventually show, is to have pushed for a premature reopening of the US economy in the midst of the pandemic and a resurging of virus infections.

Indicators of a second wave in the US are now rising in no fewer than 18 states, most of which are located in the South and Southwest.
Key indicators of a virus re-surge in the US—like hospitalization rates, death rates, and the test positivity rate—are all on the increase throughout those 18 US states. In some states, like Arizona, the availability of ICU beds is fast approaching maximum capacity. Texas is now experiencing more than 2,247 new hospitalizations per day, after having stated to reopen its economy weeks ago, on May 1. That’s seven straight day of rising hospitalizations per day for the state. Florida experienced a new one day record of more than 1900 cases just this past Friday. Alabama, Arkansas and South Carolina are all witnessing surging hospitalizations as well, approaching max capacity in ICU beds.

But it’s not just the deep South. West coast states—Nevada, Oregon, Alaska, and others—are recording a new rise in cases, reversing a prior downward trend. That fact suggests what’s going on now is more than just a first wave. What we may now have is a simultaneous extension of the first wave into the red states, as well as an emergence of a second wave congruent with that extension.
Meanwhile, scientists have recently confirmed that the Coronavirus has indeed now mutated, and is potentially five times more contagious.

Congruent Developments Fanning the 2nd Wave

It is in this general environment that the US is now rushing toward reopening its economy, especially in the South, Southwest and Mid-west, where a more or less full reopening is entering its fifth week in some cases. Added to the premature reopening are public demonstrations against policy brutality that have grown and continue, overlaid on the economic reopening. Perhaps the biggest factor contributing to the emergence of a second wave, however, has been the lack of public self-discipline in many states, especially the ‘red’ ones where Trump’s political base is concentrated. A rising disregard of social distancing has been the growing norm in many states. It’s not just that many people don’t believe they can catch the virus; it’s also that they just don’t care if they spread if they do come down sick.

Add to all this the example of President Trump himself, who has announced he now plans to begin holding mass election rallies once again—thus sending the message to the public it’s ok to engage in mass gatherings. And if they are to follow Trump’s example, they’ll do so without wearing face masks. As the moronic right wing blogosphere has been saying—and Trump has again picked up—the rising rates of infection are because we’re testing too much. Social distancing may have ‘flattened the curve’ in places like New York City and big urban centers of the northeast. But the general economic reopening now underway, the widespread protests and demonstrations against police brutality, Trump’s personal behavior example to his political base and, probably and most important, the general lack of social discipline by the populace in many regions like the country, have ensured the effects of Covid -19 in the US are now on the rise once again.

And it does not appear any of these sources driving a 2nd wave are about to abate any time soon.

Trump administration key spokespersons, like economic advisor Larry Kudlow and Treasury Secretary, Steve Mnuchin, have both declared publicly this past week the US economy will not shut down and shelter in place again a second time. Trump thus has decided to trade tens of thousands of more US lives for the right of business to return to producing revenues and profits.

Nor does it appear Black Lives Matters protestors, mobilizing against decades of intensifying police brutality, will relent in their public demonstrations.

Nor that a majority of residents of the ‘red’ states will finally acknowledge the need for social discipline and social distancing soon by all indicators when the trend is actually opposite.

Nor does it appear Trump is about to reconsider holding mass election rallies, an action that sends a clear message to the rest of the country that it’s ok to gather in large groups, to abandon social distancing, and mask wearing.

A 2nd Wave Means W-Shape Economic Stagnation…Or Worse

In short, it is increasingly likely that things are about to get worse in terms of US public health. And as that happens, so too will the US economy experience a further negative impact from the virus. A 2nd wave now emerging means not just a further decline in public health, but an eventual 2nd wave of problems for the US economy as well.

What a second wave all but ensures is that the US economic recovery will not be ‘V-Shape’ but will be ‘W-Shape’; that is, a W shape recovery characterized by periods of short and shallow GDP growth, followed by brief periodic economic relapses thereafter. These short, shallow recoveries and relapses may repeat and continue for years to come.

Following such a duration of economic stagnation, a major threat grows that could usher in an economic depression perhaps even worse than the 1930s: should the economic stress building from weak, short and shallow recoveries—i.e. an extended deep economic stagnation for years to come—result in an inevitable flood of business, local government, and household debt defaults and bankruptcies, it will eventually overwhelm the financial system. At that point the short-shallow recoveries and relapses will give way to a more generalized banking crisis that will make 2008-09 great recession appear as a minor dress rehearsal. A next great depression rivaling, and perhaps exceeding, the experience of the 1930s may well be the consequence in 2021 or beyond.

Great Depressions are always the result of mutually amplifying crises in the real and financial sectors of the economy. The current deep contraction of the US economy has yet to experience a subsequent banking-financial system crash. However, the longer the current seriously wounded US economy continues to stagnate, slipping in and out of recessions for years, the more likely it becomes that a wave of business and consumer defaults (i.e. failure to pay interest and principal) on record levels of business-household-local government debt will wash over the economy.

When that happens, banks will have to assume the bad debt of failed companies, households, and local governments on their own bank balance sheets. That freezes up lending to business and households in general. Further mass layoffs then follow. Following the bank lending freeze, the real economy contracts still further as the banking system crashes. A financial crisis converges with the real, deep economic contraction and stagnation already underway. As the two systems—financial and real economy—mutually interact and amplify each other, the outcome is a descent into a bona fide economic depression.

2008-09 Great Recession & 2020 Briefly Compared

In 2008-09 it was the financial side that crashed first, subsequently dragging down the real economy 5%-10% for several quarters and producing unemployment rates of 15%-20%. Thereafter it took six years just to recover the jobs lost in 2008-09 and return to 2007 employment levels. Wages for most working families stagnated or fell for the next decade. Working class family debt ballooned in lieu of real wage gains across all categories: credit cards, autos, mortgage, student debt, installment debt, etc., to almost $15 trillion today. In the first three months of the virus that household debt has risen 16% further, according to the New York Federal Reserve. Federal Reserve policies of 2008-09 quickly bailed out investors and the banks, but did little for jobs, wage and income levels for workers, and working class living standards in general.

At the same time corporate profits nearly tripled from 2009 to 2019. Corporate America in turn awarded its shareholders nicely. Stock buybacks and dividend payouts under Obama averaged more than $800 billion a year from 2009 through 2016. To that under Trump was added a further $3.4 trillion in just three years. That’s a total of more than $10 trillion of income and wealth distributed to shareholders in a decade! In contrast to wage stagnation and decline for the bottom 80% of US households.

This time, in 2020, the causal relationships between the two sectors—real and financial—are reversed. This time it’s a crash of the real side of the economy, at least four times worse than that which occurred in 2008-09!

In 2008-09 it was the financial crash that precipitated, accelerated and deepened the real economic contraction. Today in 2020 the causal relation is reversed, and may prove worse. The real economy contraction and extended stagnation may precipitate a financial crisis which, in turn, could feedback further on the real economy and cause an even deeper and longer contraction. Mutual feedback historically always leads to a great depression. It doesn’t matter which precipitates which. The mutual negative interaction is the key determinant that drives the depression.

In just the 1st wave of Covid-19, from late February through May 2020, working class households lost more than $1 trillion net in wage income—even after $500 billion in expanded unemployment benefits and government $1,200 checks are factored. In contrast, corporations were provided since March with $1.7 trillion in loans and grants plus another $650 billion in further business tax cuts under the March 2020 ‘CARES Act’. And the Federal Reserve US central bank has provided another $3.3 trillion in loans to banks, to corporations, and to investors as well. That’s a 10 to 1 ratio: more than $5.5 trillion to business and only $500 billion to the rest. Most of the subsidy to business is being hoarded, moreover; whereas, most of the $500 billion has been already spent. Neither provide any further real stimulus to the economy in the second half of 2020.

In the 2nd wave on the horizon, moreover, more of the same is yet to come, as it appears likely Congress in its forthcoming ‘HEROES Act’ will discontinue the March 2020 unemployment benefits extension that expires the end of July; will refuse to provide further income supplement checks; and will instead use the ‘savings’ from such programs to provide direct wage subsidies to business. By some estimates, the Government (and thus the taxpayer) plans to subsidize business further by providing a wage subsidy of up to 85% of wages that were previously paid by businesses to their employees. In short, instead of unemployment benefits to workers, it will be wage payment subsidies to businesses.

In short, a 2nd covid-19 wave will coincide with an already seriously depressed US economy with little further real economic stimulus in the pipeline. That contrasts with the great recession of 2008-09, which hit a real economy that was still growing strongly when recession hit late 2007.

The Great Capitalist Experiment: Pre-Bail Out the System

So far the central bank of the USA, the Fed, has staved off a banking crash in the short term by pumping the $3.3 trillion into bankers and investors, in effect pre-emptively bailing them out before a crash actually occurs!

Congress has provided the $1.7T to date with which to pre-bail out the non-banking side of the business economy with loans and free grants, as well as provided an additional $650 billion in business-investor tax cuts.

The Fed has provided an additional $3.3 Trillion through its various 11 special lending facilities in virtual ‘free money’ to banks & businesses.

And both Congress and the Fed have signaled they are prepared to provide still more to business and investors in coming months if necessary—if not to workers, consumers, and state and local governments.

An historic policy experiment is thus now underway in the US economy. By pre-emptively bailing out the banking system with trillions of dollars of liquidity (i.e money at low or no interest rates) the Fed is attempting to ‘fatten up’ the banks with record excess money reserves on hand to enable them to absorb the defaults, bankruptcies, and deflation that are coming—even before it occurs.

Simultaneously, in another historic first, the Congress and Fed together are pre-bailing out broad sectors of non-bank businesses in the US with the $1.7T in business-corporate loans and grants. That non-business bailout is designed to reduce the flood of defaults and bankruptcies even before they ‘hit’ the banking system.

So the Fed—with funding assistance from the US Treasury and Congress—is bailing out the capitalist system today even before it crashes. Whether it will succeed in doing so remains to be seen.

One thing is certain, however. The Capitalist state in the 21st century in the USA today is engaged in a massive subsidization of Capitalism itself on a grand scale never experienced or even envisioned before. It is flooding the system with free money and liquidity (loans, grants, tax cuts, QE, corporate bond purchases, etc.) in an attempt to prevent another ‘great recession’ of 2008-09 that would prove to be an even ‘greater recession of 2020-21’—or perhaps morph into the first Great Depression of the 21st century.

A second virus wave will certainly test the experiment of a massive pre-bailout of the system now underway. How broad and deep the second wave goes is yet to be determined. Similarly the specific economic ‘transmission mechanisms’ and ways in which the health crisis impacts and exacerbates the current economic crisis further.

But even if there is no second wave of significant dimension in coming months, the independent dynamics of the current crisis will eventually precipitate a banking-financial crash at some point nonetheless. For the US and global capitalist economy is seriously wounded, fundamentally. It was already slowing and in decline in the US and globally in 2019 in certain sectors of the economy. A second virus wave will accelerate the process of weakening and decline, as it did the first wave. At some point that will inevitably translate into a financial system crisis once again as well. At that point, a new phase, more serious, of the crisis emerges: i.e. the financial crisis occurs, more likely than not drives the seriously wounded ‘real economy’ into a deeper contraction. No longer mere stagnation and W-Shape. Now a clear descent into bona fide economic depression similar to the 1930s, or perhaps even worse.

Until the financial crash takes place, the US economy stagnates more or less in a W-Shape trajectory. Short shallow recoveries will be followed by short relapses and returns to recessions. This will occur regardless of whether a significant 2nd wave of the virus impacts the economy.

The Covid-19 effect, whether first or second wave, is not the sole factor driving the economy and the current economic crisis. Forces have now set in motion a continuing economic crisis, virus or no virus. It’s just a matter of time and place before the economic crisis enters a new and even more unstable phase.

It’s not a Covid-19 economy. It’s a capitalist economy, the instability of which has been rendered even more unstable by the current Covid-19 health crisis. And that instability is not going away should the virus disappear which, of course, is not about to happen either.

Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com and hosts the weekly radio show, Alternative Visions. His twitter handle is @drjackrasmus.

posted June 10, 2020
Confronting Institutional Racism

June 3, 2020

A week ago in Minneapolis, for all the world to see, a black man, George Floyd, was murdered by a policeman, Derek Chauvin. Protests broke out in nearly 100 American cities, and even worldwide, and have continued now for more than a week.

Murders of black men by police in America are not new. They are endemic. So why the deep, widespread, and sustained protests this time?

Certainly the nature of this particular murder explains in large part the especially angry protests and response. But it’s not the entire explanation. Youth of all color, race and ethnicity are leading the demonstrations.

A Sadistic, Merciless & Intentional Killing

The killing of George Floyd was a particularly reprehensible police murder. It was clearly intended. It was merciless. It was sadistic. As the world has watched, Floyd was cuffed, face down on the street, pleading for his life. And the more he pleaded, the more Derek Chauvin, the cop, seemed determined and unrelenting, intent on keeping his knee on Floyd’s neck. The first six minutes, as Floyd pleaded for his life, even pitifully calling out for his mother at the end, a sure indication he felt he was nearing his last moments of life. But for almost 3 minutes more Chauvin’s knee remained after Floyd had already lost consciousness.

What angers those who observed the murder most is the lack of mercy shown by Chauvin and his three complicit partner officers. What they showed was clearly an intention to kill. Chauvin appeared almost to take pleasure in keeping his knee on Floyd’s neck for three minutes more after he lay motionless. That made it a particularly sadistic murder.

It suggested to observers of the video, especially to black folks, that the police in 2020 will show you no mercy. Plead all you want for your life when cuffed, helpless, face down in the dirt. They’ll still murder you. And apparently enjoy it in the process!

The murder act was followed soon by another typical series of events, also all too often occurring in America today: Minneapolis police and the city’s district attorney (DA) office prevaricated and hesitated taking action, only responding when protests erupted. That delay suggested a typical cover up was underway, as is so often the response of local authorities in such cases.

There’s a big problem in America today: the cozy relationships that exist between police and DA offices. Both ‘scratch each others’ backs’, as the saying goes: The DA depends on police testimony to get convictions in court; in turn the DAs go light and help protect the police in exchange for their favorable testimonies. Police unions frequently provide significant campaign donations to District Attorney candidates that favor them, creating a kind of political ‘conflict of interest’ by Das. Coroner offices play a contributing role, by providing whatever autopsy results are necessary to support the DA. Carefully selected Grand Juries, should legal challenges to murder get that far, then endorse their joint mutual cover ups. It’s an institutional arrangement that too often thwarts the process of Justice.

So it’s not just an occasional racist cop. It’s institutionalized racism. A pattern that repeats over and over again. This is what the protesters of Floyd’s murder also realize and demonstrate against. They’ve seen it before. Time and again.

Black folks today know that pleading for your life when about to be murdered—like pleading for Justice after the fact—will more often than not fall on institutional deaf ears when police brutality is concerned. No mercy and no justice come in the same institutionalized racist package.

Protests As Acts of Solidarity

The immediate and increasingly angry protests that followed the murder of George Floyd are not due solely to the police killing of Floyd. The media would have you think so. That it’s only about the murder of Floyd and policy brutality. The politicians would like you to think so. All those leaders calling for calm and dialogue want you to believe so.

Floyd may have been murdered in nine minutes. But many youth in America today, especially but not only youth of color, feel their own lives are slowly and steadily being drained on a daily basis, sucked dry by the unfairness and injustice of ‘the system’. They feel that system—a capitalist system that increasingly rewards the wealthy and ignores the rest as never before in its history—has its knee on their necks too. And that system, that knee, is no less unrelenting, shows no mercy, and has no intent on relieving the pressure.

Working class youth of all color today know their lives are being destroyed more insidiously, step by step, year by year, as they struggle to survive: laid off and moving from low paid job to job, accumulating crushing debt laid upon debt, lacking minimal health benefits, changing apartment to apartment as rents are continually raised, with no hope of ever having a normal family life, of ever paying off student loans, in effect having to live a 21st century form of economic indentureship, a second or even third class economic citizenship—while they watch multimillionaires and billionaires almost exponentially add to their wealth.

In just the last three years under Trump, corporations registered record profits, wealthy investors and 1% were given $4.9T in tax cuts and $3.4T in stock buybacks and dividend payouts. While the rich and their corporations get richer, the rest make due with stagnant or falling wages, working two and three jobs, and constant job loss and turnover.

All those protestors on the streets this past week—virtually all young folks—are not just demonstrating against the murder of Floyd and institutionalized racism. That’s the tip of the protest spear. But it’s more than that. It goes deeper than that. There’s a deeper frustration and desperation behind it all, affecting tens of millions but especially American youth.

The youthful protesters looked at Floyd and they saw themselves. The protests are thus an eruption of social solidarity among wide sections of American youth! Not just among black and minority youth but American youth in general. Look at the composition of the demonstrators city after city. They are mostly Millennials and GenZers of all races and ethnicities and gender who feel they have been left behind by ‘the system’. Left out and declared disposable. They are virtually all working class youth. What the protests show is that Class and Race are coming together! Especially among the youth.

They are fearful of police brutality, especially blacks and youth of color. But they are fearful as well of being condemned to a life of low paid, no benefits, insecure and futureless part time and temp work. Working often two and even three jobs cobbled together just to get by.

And now, with the advent of the Coronavirus pandemic, even those mostly low paid service jobs have been wiped out by the virus and recent economic crash—many of which, they sense, aren’t coming back soon or even at all. The Congressional Budget Office today, June 2, 2020 announced it will likely take ten years for the jobs now being lost to come back, and many won’t return at all! There will be no V-shape quick recovery. It will be W Shape, extended over a decade or more, with periodic brief and weak recoveries followed by repeated relapses and recessions—whether or not there are subsequent waves of the virus. The economic die is cast. The US economy (and global) have entered a phase of chronic, long run decline.

What the protestors don’t realize yet, but will soon, is that more of their low paid jobs with no future are about to be wiped out by the coming Artificial Intelligence revolution and automation now ramping up. According to McKinsey Consulting, AI will eliminate 30% of all occupations in the next five to ten years. Even their low pay, futureless service jobs will be eliminated.

Add to all the above fears of the worsening climate crisis the protesting youth know they will have to live through. And to that the growing public awareness of a deepening political crisis in America, as the nation drifts into tyranny driven by the Trump wing of the US political elite.

The USA has entered a ‘triple crisis’: health care & environment, jobs and the economy, and a growing political crisis of Democracy in America itself. The protestors know this. They sense and feel it and are growing frustrated, angry and desperate. The youth of America are growing increasingly desperate. All that ‘social crisis kindling’ is feeding the protests. Police brutality, institutional racism, and murder is just the spark that has set it all off. It’s not just about George Floyd any more.

WHAT TO DO? SOME PROPOSALS

So what’s the solution(s)? To escalating police murders; to white supremacist provocateurs who are intent on stoking a race war (as they say in their own words); to the sub-classless looters that prey upon the protests and demonstrations; to the local institutionalized racism. What might be done?

It’s no longer acceptable to say, as elites of both parties and their media declare daily, that demonstrators should calm down, go home, and let’s dialogue about how to reform the police. That’s been done before. Many times. With little result. It’s time for black folks, protestors and demonstrators on the streets today to develop their own independent solutions to the problem of police brutality.

There are three general actions that might be undertaken immediately to confront institutional racism in America that chronically gives us murders of George Floyds:

1. Break the iron nexus between Police Departments and District Attorney Offices

2. Launch a National ‘Policing the Police’ Movement

3. Form Local Community ‘Committees of Safety’

At the core of institutional racism is the relationship between local police departments and District Attorneys. The police rely on the DAs to smother, delay and defuse investigations and prosecutions of police who have engaged in brutality and murder against black and other minorities. The DAs depend in turn on police testimony in court cases to enable them to win their cases and advance their personal careers. In exchange for police assistance, the DAs go light on police charged with brutality. Knowing they are covered, police feel more inclined to shoot first and not worry about the outcome. It’s a ‘scratch my back-I’ll scratch yours’ mentality that permeates both institutions—police departments and DA offices—nearly everywhere in America today.

Coroner’s offices play a secondary but important role in the process when a murder is involved. They assist the DA by rendering a decision of the cause of death that conveniently points away from the police action in question. The decease died of a heart attack and had underlying heart problems is often the official cause of death. It wasn’t choking of the defendant by the police. It was a heart attack that would have occurred regardless of the choke hold. The guy had a bad heart or some other underlying condition was the cause of death—not the police tactic employed.

Another institutional player in the charade is often a local Grand Jury. This archaic institution is nothing like a real ‘jury’, although called that. It is a selected group of often pro-police and so-called ‘upstanding citizens’—meaning more often than not white, conservative and business oriented. Grand juries often rule to throw out charges, giving the DA cover not to proceed to prosecution. Should the DA still proceed, the charges are reduced from murder to something less based on Grand Jury lesser recommendations. If convicted, the police in question’s penalty is often reduced to only employment termination. But he is then eligible to go to another police dept. and rehired. Police departments often have a silent understanding to rehire each other’s ‘bad apples’. Thus a cop with a long record of abusing blacks and minorities continues to work somewhere ‘down the road’. It’s not unlike the Catholic church simply moving some pederast priest to another parish.

Breaking the Police-District Attorney Cover-Up Nexus

• Local DA’s must be prohibited from prosecuting their local police in cases of racist related brutality and murder. The prosecution responsibility must be moved to an independent source outside the county or city.
• Police department unions and organizations should be prohibited from contributing to DA election campaigns
• Coroners should be selected by the murdered party’s family to ensure impartiality
• Grand Juries should be abolished, especially and starting with cases involving police brutality and killing
• A police discharged for cause, involving a racist brutality case, should be prevented from rehire by another police department anywhere

Launching a national ‘Policing the Police’ Movement

• A national ‘Policing the Police’ movement should be launched. Wherever a cop confronts and stops someone, the public should use smartphones or other photo devices to record the interaction. This is now done haphazardly and occasionally. There should be a general education effort nationwide to get everyone to engage in the practice of video recording police whenever they see a police interaction with any citizen.
• An independent national database of photos and video recording of confrontations should be created.
• A public education campaign should be launched as well, encouraging the public to immediately send all videos to the independent national database.
• The public database should be accessible to everyone online

Forming Local Community ‘Committees of Safety’

• All cities should form local community ‘Committees of Safety’ to police the police, to gather information on confrontations and make the information available to the general public
• The Committees should organize protests and demonstrations and coordinate with other Committees outside their local area to organize larger protests and demonstrations
• During protests and demonstrations, Committee members should undertake the task of identifying, confronting, and rooting out provocateurs. And distribute photo leaflets of known white supremacists and provocateurs to participants in the protests and demonstrations
• The Committees of Safety should publicize to the community at large those identified as looters during the protests and demonstrations
• Committees should endorse and run candidates for city councils, city managers, DAs, and local elected judgeships that are committed to, and supportive of, black lives matter and other minority civil rights
• Committees would raise demands for local ordnance changes and state wide legislation to protect the rights of demonstrators, and organize recalls of politicians who do not
• Committees would undertake other measures as necessary to ensure the safety of protestors from provocateurs, white supremacist violence, and other proponents of violence against people or property during demonstrations

Many of these proposals are not new. Others are being introduced by protestors right now. But the point is the protests and demonstrations should be taken to the next organizational level. They cannot go on as just spontaneous events. They will eventually dissipate without organization. Or be captured by provocateurs and looters. Or manipulated by politicians for purposes of personal election and careers. Or all the above.

Without organization, the ‘I Can’t Breathe’ anti-racist, anti-policy brutality movement that has swept the country runs the risk of eventually fading—just as had other promising popular movements like ‘Occupy’ in 2011 and the ‘Yellow Vests’ in France of a few years ago. Without organization, the provocateurs and looters will also increasingly displace the protestors in the media–providing cover for a ‘law and order’ right wing reaction that will use the violence to crush the demonstrations while ushering in still further restrictions on civil liberty rights of assembly and expression. Nor will the police and politicians rid the protests of provocateurs and looters. The protestors must do so themselves. But that cannot be done without organization.

The other even greater risk, absent organization, is that mainstream politicians will divert the energy and anger of the protestors into channels to get themselves elected.

Organization is needed as well simply in order to expand and build the protests and demonstrations, and to ensure they continue with ever larger turnout.

Forming local community ‘Committees of Safety’ are the core organizational element necessary for building the organizational power of the protests and demonstrations. Launching a ‘policing the police’ movement is a way to connect the general ranks of the demonstrators—and the public in general—to the work of the Committees of Safety. And the Committees and the public Policing the Police movement are together the means by which to independently politically attack the institutionalized racism embedded today in the relationships between police departments, district attorneys, coroners, and Grand Juries.

Breaking institutional racism requires an independent political movement, with a grass roots organizational structure. That independent movement is on the streets of America right now. Will it take the movement to the next level, a level necessary to break the embedded local institutions of racism?

Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at http://jackrasmus.com. Tweets at @drjackrasmus, and hosts the weekly radio show Alternative Visions on the Progressive Radio Network in New York. His website is http://kyklosproductions.com.

posted May 19, 2020
Low-Balling the Unemployed in the Era of the US 2020 Great Recession

This past Friday, May 8, the US Labor Dept. released its latest jobless figures. The official report was 20 million more unemployed and an unemployment rate of 14.7%.

Both mainstream and progressive media reported the numbers: 20 million more jobless and 14.7%. But those numbers, as horrendous as they are, represent a gross under-estimation of the jobless situation in America!

One might understand why the mainstream media consistently under-reports the jobless. But it is perplexing why so many progressives continue to simply parrot the official figures. Especially when other Labor Dept. data admits the true unemployment rate is 22.4% and the officially total unemployed is 23.1 million.

Here’s why the 20 million and 14.7% is a gross under-representation of the magnitude of jobless today:

Only Half Month Data

First, the 20 million for April is really only for data collected until mid-April. Nearly 10 million more jobless workers filed, and received, unemployment benefits after mid-April. And likely millions more jobless have been attempting to get benefits but haven’t. Even officially, more 33.5 million have filed for benefits, with several millions more in the pipeline. So the April numbers of jobless—both receiving benefits and not yet getting them—are more than 20 million!

Only Full Time Employed Layoffs

An even greater misrepresentation is that the official 20 million unemployed represents only full time workers becoming unemployed. It’s the figure from the government report that is the category called U-3, or full time workers. There are between 50-60 million more workers who are part time, temp, contract, gig and otherwise ‘contingent’ workers (i.e. not full time) who are not considered in the 20 million and 14.7%.

Check out the Labor Dept’s own data, in Table A-8, which shows for March and April no fewer than 7.5 million part time workers became unemployed. In April jobless in this group doubled over the previous month, rising by about 5 million in April, according to the Labor Dept.’s own monthly ‘Employment Situation Report’. 5 million to 7.5 million represent what’s called the U-4 government unemployment rate.

But there’s still more. It’s what’s called the U-5 and U-6 unemployed. Who are they? They are what the government calls workers without jobs who are ‘marginally attached’ to the labor force and workers who are too ‘discouraged’. They are just as ‘jobless’ as full time and part time workers. But they’re put in another category simply because they haven’t actively looked for a job in the most recent four weeks.

You see the US government defines unemployed as that subset of jobless who “are out of work and actively looking for work”. If you haven’t looked in the last four weeks, you may be jobless but aren’t considered unemployed! Go figure. Add them to the U-3 unemployed, and the totals for unemployed in America rise to 22.4%. Add in those who filed for benefits in the last half of April, or tried to, and we get closer to the publicly admitted 33.5 million without jobs and receiving unemployment benefits.

The Disappeared 8 Million Unemployed

But that’s not even the whole real picture. The way the government defines unemployment a worker must be part of the labor force. The labor force is composed of two groups: those who have jobs and those who are officially unemployed—i.e. out of work and looking for work in past four weeks. If you are not looking, you’re ‘marginally attached’ (U-5, U-6). It assumes if you have stopped looking in the past four weeks you are part of the 850,000 ‘marginally attached’. But that figure is not credible. Somehow there are less than a million jobless who simply haven’t tried to find a job in the last four weeks? Really? There are many millions.

A government stat that suggests there are likely millions more not in the labor force who are jobless nonetheless is called the ‘Labor Force Participation Rate’. It estimates the percent of the working age population who either have a job or are officially unemployed.
There’s approximately 164.5 million employed/officially unemployed in the US labor force as of May 1, 2020. In February 2020 the labor force participation rate was 63.4% of the US labor force. As of May 1, that had dropped to only 60.2%. Over the past 12 months, roughly 8 million have dropped out of the labor force. And remember: if they aren’t in the labor force they can’t be counted as unemployed. So where did the additional 8 million dropping out go?

The US government doesn’t consider them unemployed so they don’t show up in the U-3 or even U-6 statistics! But if they aren’t in the labor force they are jobless by definition. Perhaps 850,000 are counted as the ‘marginally attached’. But what about the remaining 7.2 million or so? The government has no category for them except the estimation of them in the labor force participation rate. It tries to explain the large number away by saying they retired or went back to school. But did 7.2m (63.4% in Feb. drop to 60.2% in April) retire in 2 months? And they certainly can’t have gone back to school in mid-March/April 2020.

Another government statistic that corroborates this ‘missing 8 million’ in the labor force participation rate is called the Employment to Population Ratio stat. It measures how many are in the labor force as a percent of the total US population of nearly 340 million.
If the EPOP percentage goes down, then fewer are working even though they’re obviously still alive and part of the US population. That figure has declined from 61.1% of the US population employed to 51.3% of the population employed as of May 1, 2020. That’s a nearly 10% drop. 10% of 340 million is about 34 million. And 34 million is not 20 million for April, or even the Labor Dept.’s total 23.1 million.
So both the labor force participation rate and the employed to population ratio both suggest the Labor Dept.’s official U-3 (or even U-6) unemployed figures are grossly under-representations of the total Americans without jobs today.

Voluntary Jobless Are Not ‘Unemployed’

One possible reason for the discrepancies between the official unemployed of 23.1 million vs. the 33.5 million receiving benefits, or the 7-8 million not being counted per the labor force participation rate and EPOP ratio, may be due to the government in this current crisis choosing not to count as unemployed those workers forced to leave work since February to care for dependents.

Remember the government’s driving definition of unemployed is the worker must be ‘out of work and actively looking for work’. Millions of workers who have been forced by the current crisis to leave their job to care for elderly and disabled family members, or to care for young children forced to stay home due to school closures, are not ‘actively looking for work’. Few Americans can afford nannys to watch their young children so they can work. But those in this situation are not considered unemployed by the US Labor Dept. because they don’t fit the definition of ‘actively looking for work’! It’s not clear how many in this category the Labor Dept. has recently refused to acknowledge as officially unemployed.

In America you may be jobless, but that doesn’t necessarily mean per the government you are unemployed!

The above stats and data show that the under-reporting of the jobless in the US is not some kind of conspiracy by the Labor dept. and the government. The data are there, buried in the monthly labor reports beyond the executive summaries. The government stats, moreover, are not perfect. There are serious problems related to raw jobs data recovery, to the various assumptions on that raw data the government makes to come up their jobs ‘statistics’ (always operations on raw data with assumptions which data to count and how). There are conflicting conclusions often between this or that data or statistic. Furthermore, in recent years changes in statistical processing have sought repeatedly to change definitions and processes in order to ‘smooth out’ swings in the statistics—whether employment, unemployment, wages, or inflation. The government has a vested interest in ensuring the smoothing. It reduces government (and especially business) costs of programs and operations.

If there’s a conspiracy of sorts, it’s in the media that purposely seems to always ‘cherry pick’ the most conservative stat to report. Thus we get the media trumpeting every month the nearly worthless statistic of the U-3 unemployment rate—a stat that applies only to full time workers and ignores part time, temp and other contingent labor who make up now nearly a third of the US labor force; a statistic based on a narrow definition of unemployed that has become an oxymoron when estimating unemployed; a statistic based on questionable assumptions and data gathering; and a statistic that can’t be reconciled with other statistics like the labor force participate rate.

The real unemployment rate is not the U-3 figure of 14.7% but easily 25% today. And the real total jobless are not the U-3 20 million, or even 23 million, but somewhere between 35-40 million… and rising!

However, what’s really disappointing is that many progressive and left economists simply parrot the government’s and mainstream media’s misleading U-3 statistic. One can understand why the corporate mainstream media keep pushing the U-3 stat and thus trying to make the unemployment situation look better than it is (or today not as bad as it is). But progressive economists should know better.

Jack Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, and ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

posted May 9, 2020
The Myth of US ‘V-Shape’ Economic Recovery

The spin is in! Trump administration economic ‘message bearers’, Steve Mnuchin, US Treasury Secretary, and Kevin Hasset, senior economic adviser to Trump, this past Sunday on the Washington TV talking heads circuit launched a coordinated effort to calm the growing public concern that the current economic contraction may be as bad (or worse) than the great depression of the 1930s.

Various big bank research departments predict a GDP contraction in the first quarter (January-March 2020) anywhere from -4% to -7.5%, and for the current second quarter, a further contraction from -30% to -40%: Morgan Stanley investment bank says 30%. The bond market investment behemoth, PIMCO, estimates a 30% fall in GDP. Even Congress’s Budget Office recently estimate the contraction in GDP could be as high as -40% in the 2nd quarter.

Mnuchin-Hassett’s New Old Normal

Despite the flashing red lights on the state of the US economy, the Trump administration’s key economic spokespersons are pushing the official line that the economy will soon quickly ‘snap back’. On the near horizon is a V-shape recovery coming in the 3rd quarter (July-September) or, at the latest, the following 4th quarter. The economy may be particularly bad, they admit, but be patient folks a return to normal is on the way before year end!

Speaking on Fox News Sunday Treasury Secretary, Mnuchin, declared the US economy is about to open up in May and June and “you’re going to see the economy really bounce back in July, August and September”. And Hassett echoed the same, just a barely less optimistic viewing the snap back in the 4th quarter. Getting ahead of the bad news coming this Wednesday when 1st quarter US GDP numbers are due for release, Hassett admitted a big shock is coming on Wednesday, to be followed by “A few months of negative news that’s unlike anything you’ve ever seen”. But not to worry, according to Hassett, the 4th quarter “Is going to be really strong and next year is going to be a tremendous year”.

Meanwhile, the administration’s big banker allies were also making their TV news show rounds, singing the same ‘happy days will soon be here again’ tune. Bank of America’s CEO, Moynihan, appearing on ‘Face the Nation’ show, predicted consumer spending had bottomed out and would soon rise nicely again in the 4th quarter, October-December, followed by double digit GDP growth in 2021!

The Trump administration is pressing hard to reopen the economy now! It knows if it doesn’t the contraction of the economy could settle in to a medium to long term stagnation and decline. Business interests are pushing Trump and Republicans to reopen quickly, regardless of the likely consequences for a second wave of the virus devastating national health and death rates. There is a growing segment of US business interests desperate to see a return to sales and revenue, without which they face imminent defaults and bankruptcies after a decade of binging on corporate debt. A growing wave of defaults and bankruptcies could very well provoke an eventual financial crisis which would exacerbate the collapse of the real economy even further.

The Fed’s $9 Trillion May Not Succeed

So far the Federal Reserve central bank has committed to $9 trillion in loans and financial backstopping to the banks and non-banks, in an unprecedented historic experiment by the Fed. Not just the magnitude of the Fed bailout in dollar terms, already twice that the central bank employed in 2008-09 to bail out the banks in that prior crash, but the Fed this time is not waiting for the banks to fail. It’s pre-emptively bailing them out! Also new is the Fed is bailing out non-banks as well, trying to delay the defaults and bankruptcies at their origin, before the effects began hitting the banking system. Bailing out non-banks is new for the Fed as well, no less than the pre-emptive bank rescue and the $9 trillion—and rising—total free money being thrown at the system. But it should not be assumed the Fed will succeed, despite its blank check to banks and businesses. Its historic, unprecedented experiment is not foreordained to succeed—for reasons explained below.

For the magnitude and rapidity of the shutdown of the real economy in the US is no less unprecedented. Even during the great depression of the 1930s, the contraction of the real economy occurred over a period of several years—not months. It wasn’t until 1932-33 that unemployment had reached 25%.

As of late April 2020, that 25% unemployment rate was already a fact. The official government data indicated 26.5m workers had filed for unemployment benefits. That’s about 16.5% of the 165 million US civilian labor force. Bank forecasts are 40 million jobless on benefits by the end of May. But respected research sources, like the Economic Policy Institute, recently estimated that as many as 13.9m more are actually out of work but have not yet been able to successfully file for unemployment benefits. So the 40 million jobless may already be here. And that’s roughly equivalent to a 25% unemployment rate. In other words, in just a couple months the US economy has collapsed to such an extent that the jobless ranks are at a level that took four years to attain during the great depression of the 1930s

A contraction that fast and that deep likely has dynamics to it that are unknown. It may not respond to normal policy like enhanced unemployment benefits, emergency income checks, and even grants and loans to businesses on an unprecedented scale such as being provided by the Fed. The psychology of consumers, workers, businesses, and certainly investors may be so shocked and wounded that the money injections—by Congress and by the Fed—may not quickly result in a return to spending and production. The uncertainty of what the future may bring may be creating an equally unprecedented fear of spending the money. Economists sometimes call this a ‘liquidity trap’. But it may more accurately be called a ‘liquidity chasm’ out of which the climb back will prove very slow, very protracted, and the road strewn with economic landmines that could set the economy on a second or third collapse along the way.

The V-shape argument is predicated on the assumption that the virus’s negative effect will dissipate this summer. Those supporting the argument assume, openly or indirectly, that the economic collapse today is largely, if not totally, due to the virus. It’s not really an economic crisis; it’s a health crisis. And when the latter is resolved, the economic crisis will fade as well as a consequence.

But this assumes two things: first that the virus will in fact ‘go away’ soon and not hang like a dead weight on the economy. Second, that there were not underlying economic causes that were slowing the US (and global) economy already before the virus’s impact. The virus is seen as the sole cause, in other words, and not as a precipitating factor that accelerated an already weak and fragile economy into a deep contraction. But the virus may be best understood as an event that precipitated and then accelerated the contraction of an economy already headed for a slowdown and recession.

These latter possible ways to understand the current economic crisis are of course ignored by the advocates of a V-shape recovery. In their view, it’s just a health crisis. And the health crisis is about to end soon. And when it does, we’ll return to the old ‘normal’ and the economy will snap back. But the depth and rapidity of the decline into what is, at least, a ‘great recession 2.0’ and perhaps something more like the even deeper and longer great depression of the 1930s, strongly suggests that forces of decline have been unleashed in the US economy that have a dynamic of their own now. And that dynamic is independent of the precipitating cause of the virus which, in any event, is not going away soon either. In all cases of such virus contagion, there has always been a second and even third wave of infection and death. And Covid-19 appears the most aggressive and contagious.

It’s not just the 40 million and likely more unemployed that define the unprecedented severity of the current crisis.

Millions of small businesses have already shut down or gone out of business. More will soon follow. And many will never re-open again. The average number of days of cash on hand for small businesses before the virus impact was 27 days. Many small businesses are projected to run out of that by end of April. That’s why we are not witnessing growing protests and refusals to abide by a ‘sheltering in place’ order announced by various state governors. Small businesses and their workers, both on the brink of bankruptcy are taking to the streets—encouraged of course by radical right forces, conservative business interests, and political allies right up to the White House.
The millions of workers who haven’t been able to get through to successfully file and obtain unemployment benefits, and the millions of smallest businesses who have been squeezed out of the Small Business bailout program (called the Pay Protection Program) are fertile ground for right wing propaganda demanding the country reopen the economy immediately, even if it’s premature in terms of suspending virus mitigation efforts and almost sure to result in a second wave of infection that will debilitate the economy again later in the year.

And the flow of funding from recent small business legislation passed by Congress has been bottled up by big banks gaming the system—first using the crisis to extract concessions from the federal government on further bank deregulation, getting guarantees by the government on liability protection, ensuring they receive lucrative fees and charges from the lending, and requiring the government to reimburse them for loans that might later default and fail.

In addition to the slow distribution of the loans by the big banks, the same big banks began re-directing the small business program loan funds first to their own largest and best customers. Thus the first $350 billion in Congress funding for small business was directed to the banks’ best customers in less than two weeks. A second $320 billion supplement just added is reportedly already accounted for in less than half that time.

Despite the data on jobs, small business, and GDP much of the liberal economist establishment appear to be falling for the Trump administration official line and spin that there’ll soon be a V-shape recovery.

Liberal Economists Buy the Mnuchin-Hassett Line

The dean of liberal economists, Paul Krugman, in one of his columns recently, says it’s not an economic crisis but a disaster relief situation. Kind of like an economic hurricane, he added, that once it passes the sun will come out and shine again at the same economic intensity as before. And then there’s Larry Summers, Harvard economics professor and advisor to Barack Obama in 2009, who agreed with Krugman, saying “it’s possible to collapse and come back quite quickly.” Or Robert Reich, Cal Berkeley professor and former member of Bill Clinton’s cabinet, who declared in another TV interview recently, that the crisis wasn’t economic but a health crisis and as soon as the health problem was contained (presumably this summer) the economy would ‘snap back’.

Theirs is economic analysis by means of weather metaphors. And the error they all make is assuming that the fundamental cause of the crisis is not economic but the virus. They don’t see the virus as only a precipitating cause, exacerbating and accelerating what was a basically weak US and global economy going into the crisis, but instead the virus is the sole, fundamental cause of the deep contraction.
Krugman and other proponents of the ‘snap back’ (V-shape recovery) thesis all deny the counter argument that the current deep and rapid economic decline is precipitated by the crisis and that there is an internal economic dynamic set in motion that is taking over that driving the economy into a downward spiral regardless of the initial health crisis effect.

As one partial example of that internal dynamic: once the contraction in the real economy accelerates and deepens, it inevitably leads to defaults and bankruptcies—among businesses, households, and even local governments. The defaults and bankruptcies then provoke a financial crisis that feeds back on the real economy, causing it to deteriorate still further. Income losses by businesses, households and local government thereafter in turn cause a further decline. Once negative mutual feedback effects within the economy begin, it matters little if the health crisis is soon abated. The economic dynamic has been set in motion. Krugman and friends should understand that but either don’t, or are cautioned by their employers and political friends not to tell the whole truth lest it cause further concern, lack of business and consumer confidence, or even panic.

When mainstream economists don’t understand what’s actually happening, they hide behind their metaphors as a way to obfuscate their lack of understanding and ability to forecast the future. Or they employ the same metaphors to avoid telling the truth. But the truth is this isn’t just a health crisis. And it won’t quickly disappear even if the health issue were resolved in a matter of weeks or months.
Instead of pacifying the public with nice metaphors, they might just look at the recent past. No snap back economic recovery occurred after 2008-09, which was a contraction far weaker in relative terms than the present, with fewer job losses and a much smaller GDP decline.

2008-09 Recovery Was No V-Shape

Even after the less severe 2008-09 contraction, bank lending after 2009 did not return immediately or even normally. Only the largest, best customers of the big banks and their offshore clients received new loans from them. Bank lending to US small and medium businesses continued to decline for years after 2009. And jobs lost in 2008-09 did not recover to the levels of 2007 just before the recession began until 2015. Wages of jobs recovered from 2008 to 2015 was much lower compared to wages of 2007 jobs that were lost. The ratio between full time jobs and part time/temp/contract work deteriorated after 2009, with more of the latter hired and the former not rehired. Real wages still has not recovered to this day for tens of millions of workers at median income levels and below.

So one can only wonder what the Krugmans, Summers and Reichs are ‘smoking’ when they make ridiculous declarations about ‘snap back’ recovery. They should know better. All they had to do was look at the evidence of the historical record post-2009 that V-shape recoveries do not happen when there are deep and rapid contractions! And that’s true not only for 2009, but even for 1933 when the great depression finally bottomed out.

Between 1929 and 1933 the US economy continued to contract. Not all at once, but in a kind of ‘ratcheting down’ series of lower plateaus as banking crises erupted in 1930, 1931, 1932 and then again in early 1933. When Roosevelt came into office in March 1933 he introduced a program aimed at bailing out the banks first, and then assisting business to raise prices. It was called the National Recovery Act. That program stopped the collapse but generated only modest recovery, and by mid-1934 that recovery had dissipated. It was then, in the fall of 1934, that Roosevelt and the Democrats proposed what would be called the New Deal, which was launched in 1935 after the mid-term 1934 Congressional elections. The US economy began to recovery rapidly in 1935 to 1937. In late 1937 Republicans and conservative Democrats in the South allied together and cut back New Deal social spending. The US economy relapsed back into depression in 1938 until Congress, fearful of the return to Depression, reinstated New Deal spending and the economy recovered again to where it was in 1937. The permanent recovery did not begin until 1940-41, as the US economy mobilized for war and government spending rose from 15%-17% of GDP to more than 40% in one year in 1942.

But mainstream economists are not very attentive to their own country’s economic history. If they were they would understand that deep and rapid economic contractions always result in slow, protracted, and often uneven recoveries. There never is a ‘snap back’ when depression levels of contraction occur—or even when ‘great recession’ levels occur, as in 2008-09. It takes a long time for both business and consumers to restore their ‘confidence’ levels in the economy and change ultra-cautious investing and purchasing behavior to more optimistic spending-investing patterns. Unemployment levels hang high and over the economy for some time. Many small businesses never re-open and when they do with fewer employees and often at lower wages. Larger companies hoard their cash. Banks typically are very slow to lend with their own money. Other businesses are reluctant to invest and expand, and thus rehire, given the cautious consumer spending, business hoarding, and banks’ conservative lending behavior. The Fed, the central bank, can make a mass of free money and cheap loans available, but businesses and households may be reluctant to borrow, preferring to hoard their cash—and the loans as well.

In other words, the deeper and faster the contraction, the more difficult and slower the recovery. That means the recovery is never a V-shape, but more like an extended U-shape.

Dr. Jack Rasmus
copyright 2020

Dr. Rasmus is author of the just released book, The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020; and the preceding book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com. His twitter handle is @drjackrasmus and his website: http://kyklosproductions.com

posted April 15, 2020
Origins & Emergence of the 2020 Great Recession 2.0 in the US Economy

The Great Recession 2.0 is unfolding before our very eyes. It is still in its early phase. But dynamics have been set in motion that are not easily stopped, or even slowed. If the virus effect were resolved by early summer—as some politicians wishfully believe—the economic dynamics set in motion would still continue. The US and global economies have been seriously ‘wounded’ and will not recover easily or soon. Those who believe it will be a ‘V-shape’ recovery are deluding themselves. Economists among them should know better but are among the most confused. They only need to look at historical parallels to convince themselves otherwise.

The 2008-09 crash, less serious than the present, did not recover quickly. In the US the recovery was barely 60% of normal recession recoveries for years. Employment recovery was particularly slow, taking six years to return to employment levels just before the contraction in late 2007. Europe experienced a bona fide ‘double dip’ recession, in 2008-09 and a second more serious in 2011-13. In most economies it still had not recovered when the 2020 crisis hit. Japan bounced in and out of recession, stagnation, and weak short recoveries for the past decade.

The early 1930s decade provides yet another historical example from which contemporary, mainstream US economists fail to deduce obvious conclusions: deep contractions in the real economy inevitably lead to financial-banking system crashes that ratchet down the real economy in ever-descending stages. Deflation and defaults in the real economy inevitably produce banking system lending credit freeze ups and crashes.

The current 2020 contraction is already a great recession. And should the forthcoming business defaults and bankruptcies continue on their current trajectory, bank lending will surely dry up as financial institutions absorb the bad debts they leave on bank balance sheets. Available liquidity will disappear. More defaults and deflation will follow. And the crisis will deepen in the real economy, and erupt as well in the financial.

The Federal Reserve US central bank—and other central banks—understand the potential threat and are engaged currently in a massive, unprecedented experiment: throwing mountains of cash, loans, and liquidity in general into the system. Not only into the banks to prevent a freeze in credit as defaults rise, but directly (and indirectly) into non-financial corporations as well, to try to check the coming defaults and stabilize the related price deflation. After just a month the Fed alone has more than doubled its balance sheet, from $4 trillion to $9 trillion as it floods banks, markets, and corporations with unprecedented liquidity. Time will tell, soon, if this experiment succeeds. The odds are not great that it will. And should it not, the consequences even greater.

Contrary to apologists for the US economy, the misrepresentations of the Trump administration, the US and global economies had become quite weak and fragile on the eve of the impact of the virus.

The virus has not caused the economic crisis. It precipitated and accelerated it. And if the fantasy of a rapid control and containment of the virus happened, the forces now driving the real—and financial—economy will continue. The economic depression genie has been released from its bottle; there’s no putting it back.

In the four parts that follow, this author’s analysis of some of the key elements of the current crisis economic dynamic are described, as it emerges, still a ‘work in progress’ unfolding.

In Part 1, the analysis, published in September 2018, predicted the likely course of events of the current crisis, with comparisons of the dynamics during the first great recession of 2008-09 as well as relevant events in the great depression of the 1930s. The next crisis would share many characteristics of the previous events, but also differ in key characteristics—as all such events do. In Part 2, the early phase of the 2020 great recession is described, with the focus on the role of collapsing financial asset markets. In Part 3, the focus is on the early phase of the emergence of the current contract of the US economy in February March 2020, in both the real and financial sides of the economy. The early efforts to provide a fiscal and monetary stimulus are described. In Part 4, a partial analysis is offered why the current contraction will not result in a quick recovery.

Part 1: Comparing Crises: 1929 with 2008 and the Next

(September 19, 2018)

It is often said that the initial months of the 2008-09 crash set the US economy on a trajectory of collapse eerily similar to that of 1929-30. Job losses were occurring at a rate of 1 million a month on average from October 2008 through March 2009. One might therefore think that mainstream economists would look closely at the two time periods—i.e. 1929-30 and 2008-09—to determine with patterns or similar causes were occurring. Or to a deep analysis of the periods immediately preceding 1929 and 2008 to see what similarities prevailed. But they haven’t.

What we got post-2009 from the economic establishment was a declaration simply that the 2008-09 crash was a ‘great recession’, and not a ‘normal’ recession as had been occurring from 1947 to 2007 in the US. But they provide no clarification quantitatively or qualitatively as to what distinguished a ‘great’ from ‘normal’ recession was provided. Paul Krugman coined the term, ‘great’, but then failed to explain how great was different than normal. It was somehow just worse than a normal recession and not as bad as a bona-fide depression. But that’s just economic analysis by adverbs.

It would be important to provide a better, more detailed explanation of 1929 vs. 2008, since the 1929-30 crash eventually led to a bona fide great depression as the US economy continued to descend further and deeper from October 1929 through the summer of 1933, driven by a series of four banking crashes from late 1930 through spring 1933 after the initial stock market crash of October 1929. In contrast, the 2008-09 financial crash leveled off after mid-2009.

Similarities 1929-31 & 2008-09

Another similarity between 1929 and 2008 was the US economy stagnated 1933-34—neither robustly recovering nor collapsing further—and the US economy stagnated as well 2009-12. Upon assuming office in March 1933 President Roosevelt introduced a pro-business recovery program, 1933-34, focused on raising business prices, plus initiated a massive bank bailout. That bailout stopped further financial collapse but didn’t generate much real economic recovery. Similarly, Obama bailed out the banks (actually the Federal Reserve did) in 2009 but his recovery program of 2009-10, much like Roosevelt’s 1933-34, didn’t generate real economic recovery much as well.
After the failed business-focused recoveries, the differences between Roosevelt and Obama begin to show. Roosevelt during the 1934 midterm elections shifted policies to promising, then introducing, the New Deal programs. The economy thereafter sharply recovered 1935-37. In contrast, Obama stayed the course and doubled down on his business focused recovery program in 2010. He provided $800 billion more business tax cuts, paid for by $1 trillion in austerity programs for the rest of us in August 2011.

Not surprising, unlike Roosevelt’s ‘New Deal’, which boosted the economy significantly starting in 1935 after the midterms, Obama’s ‘Phony Deal’ recovery of 2009-11 resulted in the US real economy continuing to stagnate after 2009.

The historical comparisons suggest that both the great depression of 1929-33 (a phase of continuous collapse) and the so-called ‘great’ recession of 2008-09 share interesting similarities. Both the initial period of the 1930s depression—October 1929 through fall of 1930—and the roughly nine month period of October September 2008 through May 2009 appear very similar: A financial crash led in both cases to a dramatic follow on collapse of the real economy and employment.

But the 1929 event continues on, deepening for another four years, while the latter post 2009 event levels off in terms of economic decline. Thereafter, similar pro-business subsidy policies (1933-34) and (2009-11) lead to a similar period of stagnation. Obama continues the pro-business policies and stagnation, while Roosevelt breaks from the business policies and focuses on the New Deal to restore jobs, wages, and family incomes and recovery accelerates. Unlike Roosevelt who stimulates fiscal spending targeting household incomes, Obama focuses on further business tax cutting—i.e. another $1.7 trillion ($800 billion December 2010 plus another $900 billion in extending George W. Bush’s tax cuts for another two years—thereafter cutting social programs by $1 trillion in August 2011 to pay for the business tax cuts of 2010-11.

Policy Choices: Roosevelt v. Obama

The policy comparisons associated with the recovery and non-recovery are clearly determinative of the comparative outcomes of 1935-37 and 2010-11, as are the comparisons of the business-focused strategies 1933-34 and 2009-10 that resulted in stagnant recoveries. But the political outcomes of the policy differences are especially divergent and interesting.

No less interesting are the political consequences for the Democratic Party. Roosevelt’s 1934 campaigning on the promise of a New Deal resulted in the Democrats sweeping Congress further than they did even in 1932. They gained seats in 1934 so that by 1935 they could push through the New Deal that Roosevelt proposed despite Republican opposition. In contrast, Obama retained, and even deepened, his pro-business programs before the 2010 midterms which resulted in the Democrats experiencing a massive loss in Congress in the 2010 midterm elections. Thereafter, the Democrats were stymied by a Republican House and Senate that blocked everything. Obama nonetheless kept reaching out and asking for a compromise with Republicans, but the Republican dog bit his hand with every overture.
Obama pleaded with American voters for one more chance in 2012 and they gave it to him. The outcome was more of the same of naïve requests for compromise, rejection, and a continued stagnation of the US economy. Republicans meanwhile also deepened their control of state and local level governorships, legislatures, and local judiciary throughout the Obama period.

The final consequence of all this was Trump in 2016 as the Obama Democrats promised more of the same in the 2016 presidential election. We know what happened after that.

The forces which led to the 2008 banking crash were associated with property bubbles (US and global) and the derivatives markets which allowed the bubbles to expand to unsustainable levels, derivatives which then propagated and accelerated the contagion across financial markets in general once the property bubbles began to collapse.

The 2008 crash was thus not simply a subprime housing crisis, as most economists declare. It was just as much, perhaps more so, a derivatives financial asset (MBS, CMBs, CDOs, CDSs, etc.) crisis.

More fundamentally than the appearance of a collapse in prices of subprime mortgages, and even derivatives thereafter, 2008 was a crisis of excess credit and debt that enabled the boom in subprimes and derivatives to escalate to bubble proportions.

But subprimes and derivatives were still the appearance, the symptoms of the crisis. Even more fundamentally causative, the 2008 crash had its most basic origins in the massive liquidity injections by the central banks, led by the US Fed, that has occurred from the mid-1980s to the present. The massive liquidity provided the cheap credit that fueled the excess debt that flowed into subprimes and derivatives by 2008. (And before than into tech stocks in 1998-2000, and before that into Asian currencies (1996-97), and into Japanese banks and financial markets and US junk bonds and savings & loans in the 1980s, and so forth).

Debt Level Is Not the Whole Story

Excessive debt accumulation is not the sole cause of financial crises, however. It is an enabling precondition. Enabling the debt in the first place is the excess liquidity and credit. That liquidity-credit-debt buildup is what occurred in the 1920s decade leading up to the October 1929 stock crash. It’s what occurred in the decades preceding 2008, especially accelerating after the escalation of financial derivatives in the 1990s.

Excessive debt creates the preconditions for the crisis, but the collapse of financial asset prices is what precipitates the crisis, as the excessive debt built up cannot be repaid (i.e. principal and interest payments ‘serviced). So if liquidity provides the debt fuel for the crisis, what sets off the conflagration is the collapse of prices that lights the flame.

The collapse of stock prices in October 1929 precipitated the subsequent four banking crashes of 1930-33. The collapse of property prices (residential subprime and also commercial) in 2006-07 precipitated the collapse of investment banks in 2008, thereafter quickly spilling over to other financial institutions (brokerages, insurance companies, mutual funds, auto finance companies, etc.) after the collapse of Lehman Brothers investment bank in September 2008.

Today in 2018 we have had a continued debt acceleration since 2008. As estimated by the Bank of International Settlements (BIS) in Geneva, Switzerland, total US debt has risen from roughly $50 trillion in 2008 to $70 trillion at end of 2017. The majority of this is business debt, and especially non-financial business debt. That’s different from 2008 when it was centered on mortgage debt. It is also potentially more dangerous.

The US government since 2008 has also increased its federal debt by trillions, as it continued to borrow from investors worldwide in order to ‘finance’ and cut business-investor taxes and continue escalation of war spending since 2008. US household debt also rose further after 2008, as the lack of real wage and income growth over the post-2008 decade has resulted in $1.5 trillion student debt, $1 trillion plus in auto and in credit card debt, and $7-$8 trillion more in mortgage debt. Globally, according to the BIS, non-financial business debt has also been the major element responsible for accelerating global debt levels—especially borrowing in dollars from US banks and investors (i.e. dollarized debt) by emerging market economies, as well as business debt in China issued to maintain state owned enterprises and to finance local building construction.

So the debt driver has continued unabated as a problem since 2008, and has even accelerated. Financial asset bubbles have appeared worldwide as a result—not least of which is the current bubble in US stocks. This time it’s not real estate mortgages. It’s non-financial business and corporate debt that is the likely locus of the next crisis, whether in the US or globally or both.

Since 2008 US and global debt bubbles have been fueled once again—as in the 1920s and after 1985 by the excess liquidity provided by the US central bank, and other advanced economy central banks. The central bank, the Fed, alone has subsidized US banks and investors to the tune of $6 trillion from 2009 to 2016, as a consequence of its QE and near zero interest rate policies.

The Fed as Capital Subsidization Machine

Since 2008, excessive and sustained low interest rates for investors and business have resulted in at least $1 trillion a year in corporate debt buildup, as corporate bond issues have accelerated due to ultra cheap Fed money. The easy money has allowed countless ‘junk’ grade US companies to survive the past decade, as they piled debt on debt to service old debt. Cheap money has also fueled corporate stock buybacks and dividend payouts to investors, which have been re-funneled back into stock prices and bubbles. So has the doubling and tripling of corporate profits from 2008 to 2017 enabled record buybacks and dividend distributions to shareholders.

In 2017-18 the subsidization locus shifted to Trump tax cuts that have artificially boosted US profits by a further 20% and more. As data showed for 2018, stock buybacks and dividend payouts totaled more than $1.2 trillion. In 2019 it rose to $1.3 trillion. For Trump’s three years in office it was $3.4 trillion in combined buybacks and dividends, and that came after six years of averaging nearly $1 trillion a year under Obama. That’s more than $8 trillion income distributed by corporate America to its wealthy shareholders in the form of buybacks and dividends alone. Interest income, rent income, windfall income from investor-business tax cuts, and other forms are additional.

And where did that mountain of money provided to investors go? Certainly not in raising wages for workers. Certainly not in paying more taxes to government. It was largely diverted into financial markets in the US and globally—stocks, bonds, derivatives, currency, property, etc.; into mergers & acquisitions in the US; or just hoarded on balance sheets in anticipation of the next crisis. Another large part was invested in emerging markets (financial markets, mergers & acquisitions, joint ventures, expanding production operations, etc.) when they were booming during 2010-2016.

So where will the financial asset prices start collapsing in the many bubbles that have been created globally and in the US so far—and thus precipitating once again the next financial crisis? The BIS has been warning to watch US corporate junk bonds and leveraged loan markets. Watch out for the new derivatives replacing the old ‘subprimes’ and CDSs—i.e. the Exchange Traded Funds, ETFs, passive index funds, dark pools, etc. Watch also the US stock markets responding to US political events, to a real trade war with China perhaps in 2019, a continuing collapse of emerging market economies and currencies, to a crisis in repayment of non-performing bank loans in Italy, India and elsewhere, or a tanking of the British economy in the wake of a ‘hard’ Brexit next spring, or Asian economies contracting in response to China slowing or its currency devaluing, or to any yet unseen development. Collapsing prices in any of the above may be the origin of the next financial asset contraction that will spread by contagion of derivatives across global markets. And the even larger debt magnitudes built up since 2008 may make the eventual price deflation even more rapid and deeper. And the new derivatives may accelerate the contagion across markets even faster.

The financial kindling is there. All it now takes is a spark to set it off. The next financial crisis is coming. The last decade, 2008-18, is eerily similar to the periods 1921-1929 and 1996-2007.

Only now it will come with the US challenging foreign competitors and former allies alike as it tries to retain its share of slowing global trade; with a US economy having devastated households economically for a decade; with a massive US federal debt now $21 trillion and going to $33 trillion due to Trump tax cuts; with a US crisis in retirement income, healthcare access and costs, and a crumbling education system; with an economy having created only low pay and mostly contingent service jobs; with a virtually destroyed union movement; with a big Pharma initiated opioid crisis killing more Americans per year than lost during the entire 9 year Vietnam war; with a culture allowing 40,000 of its citizens a year killed by guns and doing nothing; with an internal transformation and retreat of the two established political parties; and with a Trump and right wing radical movement ascendant and poised to move to the streets to defend itself.

Part 2: Global Financial Asset Deflation: Prelude to Next ‘Great Recession’?

(March 9, 2020)

This morning, Monday, March 9, financial asset markets continue to implode: US stocks are further collapsing -6% (Dow down 1650, Nasdaq >500 mid-day). Ditto Asian and Europe stock markets -6%. They were already declining sharply last week due to coronavirus induced supply chain shocks (reducing production) and expanding demand shocks (consumer spending contraction in select industries like travel, hotels, entertainment)–all of which are being forecast by investors to whack corporate earnings in 2Q20 big time. But imposed on the equities market crash of the past 2 weeks now is the acceleration of the global oil price deflation that erupted yesterday as the Saudis deal with Russia last year to cut production and prop up prices fell apart. Collapsing oil & commodities futures prices are now feeding back up equities and other financial asset prices. Financial price deflation spreading, including to currency exchange rates. Money capital fleeing everywhere into ‘safe havens’ (gold, Treasuries, Yen). Historic decline of US Treasuries now below 1% (30 yr.) and .5% (10 yr).

Will the financial asset markets deflation soon spill over to the credit system (especially corporate bonds) and accelerate the decline of real economies worldwide in turn? Are traditional monetary & fiscal policy tools now less effective compared to 2008-09? If so, why? Is the global economy on the precipice of another ‘great recession’?

Financial Asset Markets Imploding

So we have oil futures market prices–i.e. another financial asset market–collapsing now and impacting the stock markets. In other words, a feedback contagion underway on stocks market prices in turn. Feedback is occurring as well on other industrial commodity futures prices that are following oil futures prices downward in tandem. But that’s not all the financial contagion and deflation underway.

The freefall in financial assets (stocks, oil, commodities) is also translating into currency exchange price deflation in turn, especially in emerging market economies in Latin America, Africa, Asia highly dependent on commodity sales with which to earn needed foreign exchange with which to finance their past debt (e.g. case of Argentina whose egotiations with IMF on how to restructure their debt will now break down, I predict).

Currency exchange rates are in sharp decline everywhere as a result. For emerging market economies that means money capital is more rapidly flowing out of their economy, toward safe havens globally like the US dollar, US Treasury bonds, gold, and the Japanese Yen currency.

In short, stocks, oil-commodity futures, and forex currency markets are all imploding and increasingly feeding back on each other in a general deflating downward spiral. This is a classic ‘cross-contagion effect’ that occurs in financial asset market crashes. And crashing financial markets eventually have the effect of contracting the real economy in turn, by freezing up what’s called the credit markets. Businesses can’t roll over their loans and refi their corporate bonds. Banks stop lending. The rest of the real economy then contracts sharply. It starts in the financial markets, spreads to credit markets (corporate junk bonds, BBB corporate bonds, then top grade bonds).

Coronavirus Effect as Precipitating Not Fundamental Cause

But it even earlier begins in a slowing real US and global economy that precedes the markets crash. The global economy was already weakening seriously in 2019. The US economy at year end 2019 was also weak, held up only by household consumption. Business investment had already contracted nine months in a row in 2019 and inventories built up too much. And, of course, the Trump trade war took its toll throughout 2018-19.

Then came the Coronavirus which shut down supply chains in China, and then in So. Korea and Japan in turn. That then began impacting Europe, already weakened by the trade war (especially Germany) and Brexit concerns. The supply chain economic impact of the virus developed into a consumer demand economic impact as well, as travel spending was reduced (airlines, cruise ships, hotels, resorts, etc.) and now, in latest development, other areas of consumer spending too. Both supply chain (production cutbacks) and demand (consumption cutbacks) are interpreted by investors as leading soon to a big fall in corporate earnings–which translates in turn into stock price collapse we see now underway. Investors have decided the 11 year growth cycle is over. They’re cashing in and taking their money and running to the sidelines, moving it from stocks to cash or Treasuries or gold or other near liquid financial assets.
So the Coronavirus event is really a ‘precipitating cause’ of the current markets crash. The real economy weakness was already there. The virus just accelerated and exacerbated the process big time. (see my 2010 book, ‘Epic Recession’ for explanation how financial causation comes in different forms as precipitating causes, enabling causes, and fundamental causes. Book reviews are on my website). Again, worth repeating: global and US economies were weakening noticeably in late 2019. The virus further impacted supply chains (production) and demand (consumption), reduced corporate earnings in the near term and thereby simply pushed stock markets over the cliff.

Mutual Feedback Effects: Real & Financial Economies

But financial crashes have the effect of feeding back into the real economy as well, causing it to contract further in turn. What starts as a weakening of the real economy that translates into financial markets crashing, in turn feeds back into a further weakening of the real economy. Mainstream economists don’t understand this ‘mutual feedback effect’; don’t understand the various causal relationships between financial asset cycles and real investment cycles. (For my explanation of this relationship there’s my 2016 book, ‘Systemic Fragility in the Global Economy’ and specifically chapters on the need to distinguish between financial asset investing and real investing and how late capitalism’s financial structure has changed such that the inter-causal effects of financial-real investment have deepened and intensified.) Financial crashes accelerate and deepen the contraction of the real economy. Recessions turn into ‘Great Recessions’ as in 2008-09. They may even turn into bona fide ‘Depressions’ as in the 1930s should the banking system not get bailed out quickly.

Corporate Bonds & Credit Markets Next?

The feedback effect of the current financial asset price deflation–now underway in stocks, commodity futures, forex, (and derivatives)–on the real economy will soon emerge as the financial markets deflation affects the various credit markets. The key credit market is the corporate bond market. Bond markets are far more important to capitalism than equity-stock markets. The credit markets to watch now are the corporate junk bonds (sometimes called high yield corporates). Junk bonds are debt issued to companies that have been performing poorly for years. They are kept alive by banks helping them issue their bonds at high interest rates. Investors demand a high rate because the companies may not survive. In good times they do. But when markets and economies turn down, companies over loaded with junk financing typically default–i.e. can’t pay the interest or principal on their bonds. They go under. The investors that bought their risky bonds are then left holding their debt that becomes near worthless. The US junk bond market today is ‘worth’ more than $2 trillion. At least a third of that is oil & energy (fracking) companies. A large part of their bonds must be rolled over, refinanced, in 2021. But many of them will not be able to refinance. Why? Because global oil prices have just collapsed to $30 a barrel, perhaps falling further to $20 a barrel. At that price, the oil-energy junk bond laden companies will not be able to refinance. They will default

That will spread fear and contagion to other sectors of the $2 trillion junk bond sector–especially big box and other retail companies (e.g. JC Penneys, etc.) that also loaded up on junk financing in recent years. Investors will disgorge themselves of junk bonds in general.
The fear of a crash in junk bonds will almost certainly spread to other corporate bonds, first to what’s called BBB grade corporates. That’s another $3 trillion market. But most of BBBs are really also junk that’s been improperly reclassified as BBB, the lowest (unsafe) level of corporate Investment grade bonds (the safest). So at least $5 trillion in corporate credit is at risk for potential default. If even a part defaults, it will send shock waves throughout the corporate economy that will have very serious implications–for both the financial and real economies, US and global, which are increasingly fragile.

Is Another ‘Great Recession’ on the Horizon?

For example, Japan is already in recession as of late last year. Now it’s contracting, reportedly, by 7% more. Europe was stagnant at best, with Italy and Germany slipping into recession before the virus hit. So. Korea and Australia are in recession now, as other economies in Asia and Latin America are now contracting as well. China economy reportedly will come to a halt in terms of GDP this quarter, or even contract, according to some sources. Meanwhile, Goldman Sachs forecasts the US economy growth will stall to 0% in the second quarter 2020.

So a collapse in risky corporate bonds will occur overlaid on this already weak real economic scenario. Should that happen, then the recession could easily morph into another ‘great recession’ as in 2008-09; maybe even worse if the banking system freezes up and central banks cannot bail them out quickly enough. Or if banks in a major economy elsewhere experience a crash–as in India or even Europe or Japan where more than $10 trillion in non-performing bank loans exist–and the contagion spreads rapidly to banking systems elsewhere

Failed Monetary & Fiscal Policies, 2009-2019

Which leads to the question can central banks now do so? After the 2008-09 crash, the Fed bailed out the US banks by 2010. But it kept interest rates near zero under Obama for six more years. Banks could still get free money from the Fed at 0.15% interest. (The Fed then paid them 0.25% if they left the money with the Fed). The Fed bailed out other financial companies to the tune of $5 trillion more as it bought up bad loans and Treasuries from investors at above then market rates. That is, it subsidized them. And did so for six more years. All this free money flowed, mostly into financial markets in the US and worldwide, creating the stock bubbles that are now imploding. So the Fed and other central banks went on a binge subsidizing banks for years, and in the process broke their own interest rate tool needed for instances like the present crisis. The Fed tried desperately to raise interest rates in 2017-18 so it could have a cushion for times like this. But it then capitulated to Trump and began reducing interest rates again in 2019–as it had under Obama for six years.

The free money from the Fed artificially boosted stock prices. On top of this Trump added a further subsidization of banks and non-bank corporations, businesses, and investors with his $4.5 trillion 10 year tax cuts passed January 2018. Most of that went as a windfall to corporate-business bottom lines. 23% of the 27% rise in corporate profits in 2018 is attributable to the windfall tax cuts. And where did that go? It too was redirected to stock and other financial markets,further inflating the bubbles. Here’s the channel and proof: Fortune 500 corporations in the US alone spent $1.2 trillion in both 2018 and 2019 in stock buybacks and dividend payouts to their shareholders. The stock buybacks inflated the stock markets, and most of the dividend payouts did as well. (Buybacks+dividends under Obama were nearly as generous, averaging more than $800 billion a year for six years).

In other words, the 25% run up in US stock markets in 2017-19 under Trump was totally artificial, driven by the tax cuts and by the Fed capitulating to Trump and lowering rates again in 2019. Very little of the annual $1.2 trillion went into the real US economy. For the past year real investment in structures, plant, equipment, etc. actually contracted for nine months in 2019, and is now contracting even faster in 2020.

Just as the Fed has busted its own interest rate monetary tool as it continually subsidized banks and businesses with low interest rates for years, the chronic corporate-investor tax cutting has busted fiscal policy responses to recession as well. Since 2001 the US has provided $15 trillion in tax cuts, the vast majority of which have gone to corporations, banks, and wealthy investors. That has led to government deficits averaging more than $1 trillion a year since 2008. And accelerated the US federal debt to more than $22 trillion. Fiscal policy is now seriously constrained by the deficits and debt–just as monetary policy as interest rates is now constrained by virtually all Treasury bond rates below 1% in the US and negative rates in Europe and Japan.

Interest rate policy responses to today’s emerging crisis is thus dead in the water. (As this writer predicted it would become in 2016 in the book, ‘Central Bankers at the End of Their Rope: Monetary Policy and the Coming Depression’). After years of monetary policy used as a tool to subsidize banks, it is now ineffective as a tool to stabilize the economy. Ditto for fiscal policy as tax policy. Used by Obama and even more so by Trump to subsidize corporations, stock buybacks, and financial markets, it is confronted by massive annual US budget deficits and accelerating national debt.

The likely responses by politicians and policy makers to the current emerging financial crisis and recessions in the real economy will be to cut taxes even further for businesses. It will have little effect, however. But will exacerbate levels of deficit and debt. That means the follow up will be to attack and reduce government spending, especially targeting social security, medicare, healthcare and education in 2021. Trump has already publicly indicated his intent to do so. On the Fed side, expect more injection of money directly into the economy and failing businesses by means of another major round of ‘quantitative easing’ (QE). That’s coming soon. Ditto for Europe and Japan where negative rates already exist. Watch China too should its economy contract for the first time in 30 years. And watch India, where it’s banking system is already fracturing due to causes totally separate from the virus effect. A banking crash in India is on the agenda. It could result in yet another financial blow to the global economy, adding to the current Saudi-produced oil price shock and the virus effect on supply chains and demand.

Summary and Conclusions

In summary, the global capitalist economy is unraveling financially, and soon further in real terms. Massive job layoffs in coming months in the US are a growing possibility. That will drive the US economy deep in contraction as household consumption, the only area holding up the US economy in 2019, now joins the contraction. It remains to be seen how US monetary and fiscal policy can restore economic stability given its self-destruction by US politicians since 2008. Trump policies have been no different than Obama’s-just more generous to corporate America and investors. Trump’s policies are best described as ‘Neoliberalism 2.0’ or ‘Neoliberal on steroids’. (see my just published 2020 book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’).

The US and global economies are well on their way to a repeat of the ‘great recession’ (or worse) of 2008-09. Only this time traditional monetary-fiscal policy is much less effective. More radical policy responses will likely be developed to try to stabilize the capitalist economies both in USA and elsewhere (where problems are even more severe). Watch closely as the crisis on the financial side moves on from equity (stock), commodities, and forex financial markets into derivatives markets and credit markets–especially junk bond and other corporate bond markets. Watch as the Fed tries desperately to provide liquidity to business and markets via its Repo channel and QE since its traditional rate channels are now ineffective. And watch as US and global capitalist advanced economies try to coordinate new fiscal policy responses to the general dual crisis in financial and real economic sectors of global capital.

Part 3: The 2020 Great Recession 2.0–Or Worse

(March 24, 2020)

In late February 2020 I was convinced the recession I have been predicting since January 2019 had arrived. Two weeks ago I began writing this would be another ‘Great Recession 2.0’, as in 2008-09. Now I’m not so convinced of even that. It may be worse, much worse.

US Real Economy: Contracting Faster Than 2008 or 1932

Just last week Goldman Sachs investment bank was predicting a -14% contraction of the US real economy in the second quarter, April-June 2020. Morgan Stanley followed with its prediction of a -30% drop in US GDP. Goldman has since modified its initial forecast to -24%.

This compares with the worst quarterly decline in 1932, in the depths of the Great Depression of the 1930s, of -13%. The current contraction, in other words, is coming faster and deeper than any on record previously—whether compared to the 2008-09 Great Recession or the 1930s Depression.

As of the close of March 2020, about a third of the US economy is now shutdown. More is about to follow. The US regions most directly and heavily impacted by the coronavirus—Washington State, California and New York—are where business activity has virtually shut down except for emergency services. Other areas, like Illinois, Texas, and Florida are catching up fast.

Given the spreading shutdowns, focused in states of high concentration of economic production, According to current Federal Reserve central bank governors, the unemployment rate will rise as high as 30%, and quickly, according to St. Louis district Federal Reserve governor, Bullard. Predictions are at least 2 million will be unemployed in March alone, just the first month of the crisis. That monthly unemployment rise also exceeds the worst months of the 2008-09 prior Great Recession.

In short, the real economy in the US has fallen into an economic ‘coma’, as some have accurately called it.

But that economy was already weak and fragile when the virus effect pushed it off a cliff. Already in late 2019, business investment had been contracting for nine months, the manufacturing sector was in a recession, trade was negatively affected by Trump’s 2018-19 trade wars, and household consumption was showing serious signs of weakening. For example, with regard to household consumption, the default rate on credit cards for median families had risen to nearly 9% by late 2019, more than 7 million auto loans had defaulted, and student loan defaults were rising as well (although covered up by clever government re-categorizing of loan defaults). The consumer was not in good shape, in other words, keeping spending afloat largely by credit based spending by the middle classes and by the high end income households’ spending based on inflating stock and financial gains (the wealth effect) and Trump’s massive tax cuts of 2018-19 flowing to their bottom lines.

Then the virus hit the economy like a baseball bat to the back of the head!

Financial Markets Price Implosion

Financial asset markets began to plummet. Artificially boosted for three years under Trump, US financial markets were fueled by Trump’s multi-trillion dollar tax cuts and low interest rates in prior years. That tax and cheap money windfall to business, senior managers and shareholders in turn was redistributed to managers and shareholders in the form of a flood of stock buybacks and dividend payouts. More than $3.4 trillion, in fact, in just the last three years!

The buybacks & dividends were then diverted once again in large part back into stocks and other financial markets once more. The artificial financial asset bubbles grew. But it was all artificial, driven by cheap money and massive tax cut income redistribution to investors, corporations, and the wealthiest 1%.

Under Trump, from 2017 through 2019, stock buybacks totaled more than $2 trillion. It went mostly to professional investors and CEOs and senior managers of companies (In tech companies, the amount of the buybacks going to CEOs and senior managers was as high as 70%, as for example occurred in Apple).

Another $1.4 trillion was distributed to shareholders in the form of dividend payouts. That’s a total of more than $3.5 trillion in tax cut and low interest driven income redistributed to the wealthiest households. Most of this massive income windfall was reinvested in financial markets. US stock markets alone under Trump rose by 25%-35% in just three years. And that’s just about the amount the same markets have now crashed in just one month under the virus’s economic impact!

Crashing stock prices are one key indicator of the onset of a Great Recession, nor a normal one. The same applies to the spread of financial asset collapse to other financial markets.

Already US stocks have contracted by 35%-40%. Oil and commodity futures prices by 40% or more, as the price per barrel of crude has fallen from $70 to the mid-$20s per barrel range. Other industrial commodity prices by 20%-30%. Currencies (aka foreign exchange) worldwide devaluing everywhere, with greatest pressure in India, Asia, and Latin America. Bond markets—corporate and government—have now begun to feel the pressure as well and are beginning to fracture. And bond markets are far more important to the stability of the capitalist economy than are even the stock markets.

As financial asset prices deflate rapidly holders of those assets try to dump them to contain losses. Everyone wants to sell; no one wants to buy. Prices deflate further. Often purchased on margin, by borrowing money to buy more assets during the boom period, ‘margin calls’ require even more selling—and even more financial asset price collapse. Investors become desperate to raise cash to cover their losses. A ‘dash for cash’ overwhelms investor, business, and consumer psychology. As losses exceed the ability to raise cash, financial markets begin to implode. And they are now falling line ‘ten pins’, one after the other.

Pre-Emptive Bank & Investor Bailouts

First stock markets, but in the past month, repo markets where banks loan to each other; then commercial paper markets and money market funds; then municipal bond markets; and residential mortgages; and leverage loans (junk loans); and, behind the scenes and intensifying, high yield (junk) corporate bonds and so-called BBB investment grade corporate bonds.

The latter junk corporate bond + BBB market in the US alone is valued at $6 trillion. Leveraged loans another $1.2 trillion. Muni bonds $4 trillion. Residential mortgages $11 trillion. All in trouble now. Plus Repos, Commercial Paper-money funds, and so on as well.
And let’s not forget oil-commodity futures global price deflation, collapsing emerging market economy currencies, and even growing troubles in national government bonds like US Treasuries, Gilts (UK), Bunds (Germany) and others, many of which were already trading in negative rate territory.

In short, the generalized financial markets collapse was a defining characteristic of the 2008-09 financial crisis. And it’s returned now with vengeance.

Also returning is the desperate effort by the Federal Reserve (and other central banks worldwide) to stuff the growing black holes in banks, shadow banks, and corporate balance sheets with new liquidity (money injections) in order to try to prevent defaults and bankruptcies. A bank-corporate bailout has already begun—even before the banks fail. It is pre-emptive in 2020, unlike ‘after the fact’ as in 2008. Banks have not yet crashed and are being bailed out!

The Federal Reserve in one week in mid-March injected $2.2 trillion in the form of $1.5T for the repo market and another $700 billion in Fed direct purchases of mortgage bonds and investor held Treasuries. It followed with unlimited further money to stave off collapse of the commercial paper-money market funds, the muni bonds, mortgage bonds, and reportedly to back up credit card and auto finance companies from their anticipated losses. The Fed also announced it would ‘swap’ US dollars for foreign currencies of other central banks in order to help their economies. The Fed has committed to $4T more in money injections to banks. And that’s in addition to the $2.2T already committed.

In other words, bankers will be bailed out $6.2T, and that’s probably just a start. That amount compares, by the way, to approximately $4.5T used to bailout the banks in 2008-09.

What about non-bank companies? They received a ten year Trump tax cut in January 2018 of no less than $4.5 trillion! They were then awarded with more tax loopholes in 2019 equal to $427 billion more. Now the Republican Senate in the US Congress is proposing another $500 billion with virtually no strings attached.

Yet Another Windfall for Non-Bank Corporate America

In contrast, the fiscal spending stimulus for Main St. and middle-working class families totals about $500B in the pending 2020 crisis recovery bill. It includes a one time cash rebate to households of $3,000 but no increase in unemployment benefits thereafter. It’s clearly a 30 day emergency package, even though the impact on the US economy from the virus will be for months to come.
The US economy generates $1.7 trillion in spending every month. The $1 trillion fiscal stimulus package coming from Congress will thus replace barely half of the lost spending by the US economy.

Big corporate interests and politicians in Washington DC know the depth of the current economic crisis—financial and real. They’re providing for the bankers and investors to the tune of $6.2 trillion, with an open ended checkbook for more if necessary. But they’re only providing for a one month bailout of Main St.

Already Trump is tweeting this package will be reviewed in 15 days. He’s thinking short term. So too are other politicians. Their media is pushing the theme that ‘maybe the economic costs are too high for the cost of the death rate from the virus’ that will occur. Politicians like New York governor, Cuomo, are raising the question, signaling the debate now rising within the economic and political elite; they are preparing the public. They are getting ready to trade off human lives for their economy. They are preparing to send people back to work after a month, regardless the health consequences. They fear economic collapse and their loss of incomes more than the virus and its destruction of American lives.

Trump may soon decide to announce “let them go back to work”. An echo perhaps of Marie Antoinette’s infamous line as her citizens were dying too: “let them eat cake”. In short, we are now about to see that people’s lives are expendable, for their profits, income and wealth that are not.

Part 4: Why a V-Shape Economic Recovery Will Not Happen

(April 9, 2020)

Various bank research departments have been estimating the depth and severity of the real economic downturn, admitting the second quarter US economy, April-June, will experience the worst contraction since the 1930s great depression. Indeed, in job loss terms the current decline is even worse. 17+ million jobs were lost, at minimum, in just the last three weeks. And that’s an underestimation, since it represents only those who actually have filed successfully for unemployment benefits. Many are still in the process of filing or won’t for some time yet. Actual unemployed totals always exceed those who file for various reasons.

Millions of small businesses have already shut down or gone out of business. More will follow. The average number of days of cash on hand for small businesses is 27. They will run out of that by mid-April. And the flow of funds from recent stimulus legislation passed by Congress is minimal thus far, bottled up by big banks that are gaming the system and using the crisis to extract concessions out of the federal government on bank deregulation and their share of profits from the lending to small business.

The 10 million plus job losses that occurred in the last two weeks of March will therefore easily exceed 20 million by mid- April. And 30-35 million by May 1.

That’s a deeper and faster fall in jobs than occurred in 2008-09. The total jobless in just a few weeks in March (more than 10 million) exceeds the total jobs lost over 19 months of the 2008-09 great recession!

And it’s not just employment that’s in freefall. The consensus among big bank research departments is that US GDP will contract by 20% or more in the second quarter. Goldman Sachs research estimates the contraction in US GDP will be 24%. Morgan Stanley investment bank says 30%. And most recently the bond market investment behemoth, PIMCO, estimates a 30% fall in GDP.

The 2020 CARES ACT & V-Shape Recovery

Whether the 2008-09 crisis or the 1930s great depression, historical parallels support the view that a rapid, deep contraction like the current 2020 recession are not followed by rapid, V-shape recoveries. Apart from historical parallels, however, current US government and central bank policy responses will also fail to generate a prompt recovery to prior economy levels. On the government, fiscal policy side, the programs to date are insufficient in magnitude, are experiencing serious problems of timing, and are imbalanced and poor in their composition to have the desired effect.

The government’s fiscal policy response (CARES Act) to date has been too little, too late; moreover, its composition is too imbalanced in favor of business instead of households to stimulate a quick economic recovery. Simultaneously, the monetary policy response to date by the Federal Reserve US central bank is being ‘gamed’ in the short run by the big banks through which much of the monetary stimulus will flow. And even more important, in the longer run, the Fed’s policy of massive liquidity injections into the banking system will be thwarted by the even greater collapse of money demand that will neutralize the Fed’s massive increase in money supply (i.e. liquidity). The Fed’s policies may succeed in delaying or even preventing a collapse of the banking system, but they will not produce a recovery of the real economy now having contracted to 1930s depression levels.

With regard to magnitude, Congress’s recently passed CARES ACT is grossly insufficient. The US economy spends $1.7 trillion every month. With virtually half of the US economy shut down by various estimates, $2 trillion in spending just keeps a floor under the economic collapse for six to eight weeks. By mid-May at latest that $2 trillion will have dissipated. Finally, the composition is heavily lopsided to loans and grants to business, large and small alike. They will hoard it, use it to pay down debt, and ration the grants and loans piecemeal and minimally until they see an end to the economic crisis months from now. If the Airlines and Boeing are a good example, the loans and grants won’t be used to maintain payrolls. The big corporations in particular will ‘game the system’ and divert the money to other business purposes or hoard it.

With regard to ‘timing’, while the CARES Act was passed relatively quickly, its implementation is showing signs of significant administrative and operational lags and delays. The unemployment benefit increases passed by Congress in its recent $2.2 trillion so-called fiscal stimulus bill has yet to reach the unemployed. Many can’t even get to the filing stage for benefits. Yet their April 1, mortgages, rents, car payments remain due—and unpaid. Nor have the much promised $1200/person checks been received as yet. That will take weeks more. In the interim, consumer spending and the economy keep sinking.

69% of middle class and below households (< $75,000 annual income) as of early April already say they are financially much worse off than just two months ago. That’s not surprising, since more than half of all US households say they have $400 or less for emergencies, per recent research by the Federal Reserve bank of New York.

The picture is no different for small businesses who were supposed to get $350 billion in direct grants and loans by the first week of April, as provided in the same recent Congressional ‘CARES ACT’ fiscal stimulus package. Although Congress per the CARES ACT has authorized the $350 billion and the US Treasury has provided the money to the Federal Reserve Bank for distribution to small businesses weeks ago. Only $90 billion or so of the $350 billion has actually gotten out to small businesses desperately in need. As of March, the average days of small business available cash on hand was only 27 days. And that was almost a month ago. So most of small businesses have already run out of funds. Meanwhile the pipeline of loans—from the Treasury to the Federal Reserve to them—has clogged up. Why? The big banks are gaming the system.

Because the way the US banking system works, the big banks are in the driver seat of the distribution of the loans. They are the bottleneck. This past week they have been using their position to slow the flow of funds to small business. They are leverage the crisis to extract more concessions out of the Fed and the government. They are demanding that before they participate and open up the bottleneck of lending that the US government and Fed reduce banking regulations, which would fatten their share of the profits from the loan distribution and reduce financial regulations they legally must deal with.

The point, however, is that the $600B rescue of small business hasn’t gotten into the economy any more than has the $500B ‘stimulus’ has for households in the form of unemployment benefits and the $1200/person + $500 per child checks. What all this gaming of the system by the big banks, and the delaying of restoring some of the lost income for workers, means is that the contraction of the real US economy continues to deepen and will do so through most of April.

Fed Liquidity Diversion & V-Shape Recovery

It is the Fed that is attempting to bail out the collapsing real economy, not Congress. It is monetary policy at the forefront, not traditional fiscal government spending policy. Monetary policy took the lead in the recovery after 2009 and failed to generate a quick recovery. And monetary policy is always slower and uncertain in generating recovery.

All the major programs targeting small-medium-large corporations are being ‘funded’ by the Fed. The Fed is either pushing money through the private banks with the objective of getting the big banks to lend to non-financial businesses in need of cash. There is some indication the Fed may at times bypass the banks and provide grants and loans, or buy financial securities, directly itself. But it is largely pushing money into the accounts of the big banks, who are then supposed to lend it to non-bank business customers in need.

When the media refers to $500 billion in loans offered to large (non-bank) corporations under the CARES ACT, or to $350B in loans to small businesses, or another $600B to mid-size businesses, these numbers actually represent anticipated final loans to businesses made by the private banks. The Fed actually provides the big banks with around one-tenth of these totals in loans. But because the US banking system is what’s called ‘fractional reserve banking’, the private banks are expected to loan out five to ten times the money the Fed deposits in the big banks’ accounts at the Fed.

But what if the big banks sit on the money provided by the Fed and don’t actually loan out 5X-10X? Or maybe loan out only 2.5X and hoard the other 2.5X? Or lend the money to US or foreign businesses offshore instead of in the US? Or loan it out and the businesses invest it in stocks and other financial securities instead of the real economy to restore and grow production? All this is what actually happened in 2008-09. Bank lending to US non-financial businesses in the US actually fell in the years immediately after 2009. Or the Fed’s direct purchase of bad assets (subprime mortgage bonds) from investors or Treasuries resulted in money from the Fed that was diverted by the private banks into financial markets or offshore. That’s why the recovery of the real economy was so weak post-2008. The Fed liquidity injections did not flow into the real economy, into real investment, employment and wage incomes. Once again, the private banks ‘gamed’ the monetary system then and will likely do so again in 2020, just as they’re already doing with the CARES Act Congressional mandated loans.

The point is the current private banking system always functions as a drag on a rapid economic recovery (V-shape) when monetary policy via the Fed is relied upon as the primary stimulus tool. And that’s what is being repeated again in 2020.

To put it another way, relying on massive money supply (liquidity) injections to restore rapid growth to the economy is, under even the best assumptions, always a slower approach to recovery and even more so less likely to produce a ‘V-Shape’ recovery.

But there are other reasons why monetary policy solutions in general also work against a V-Shape recovery; reasons that are independent of the private banks’ bottleneck effect and independent of the central bank, the Fed, pushing a massive supply of money (liquidity) into the banking system. These other reasons have everything to do with the Demand for Money which is independent of whatever the Fed and the private banks may or may not do.

Money Demand & V-Shape Recovery

What if the Fed, and even the banks, provided a massive amount of loans to business and households and local governments in an attempt to jump start a recovery—but those loan offers were not taken up by business or households? The liquidity, the supply of money, might be there but the demand for that supply does not materialize. Or maybe businesses and households ‘borrow’ the money made available, but just sit on it and keep it for emergencies? Or use it to pay down pre-existing debt levels. Or use it not to rehire laid off workers but for other business purposes? Or reinvest it in a rising stock market or use it as collateral to take on more debt, to redistribute to shareholders in the form of more dividends and stock buybacks?

None of these options and possibilities results in a recovery of the real economy, of employment, of GDP.

When a crisis is especially severe, as is the present, the strong incentive for businesses is to take the cash grants and hoard them. Or take the loans and use the proceeds to pay down prior existing debt—which for a number of US industries has reached historic highs. For example, the US $2.2 trillion corporate junk bond market is at record levels. The (junk) leveraged loan market is more than $1 trillion. The shakiest BBB level of corporate bonds at $3 trillion. Corporate debt in the US, and world wide, is at levels never before seen. On the consumer side it’s no better. Credit card debt is $1.1 trillion. Auto debt $1.3 trillion. Student debt $1.6 trillion. Residential mortgage debt $10 trillion. The point is many businesses will take the $350b (small business) and $500B (large corporations) Fed money injections and use a good part of it to pay down debt.

Another large part will be simply hoarded and held for future emergencies. There is great uncertainty whether the health effects will end in just a few more months. There are likely second and third waves of virus infections coming. Until there is a vaccine and the populace develops what’s called ‘herd immunity’ that uncertainty will remain. Furthermore, as the global economy contracts elsewhere it will enhance the uncertainty. The longer the current contraction, the more likely will defaults and bankruptcies grow—both business and household and even local governments. Defaults further intensify the uncertainty. And uncertainty means the money supply increase provided by the Fed and the banks will not be taken up by borrowing; and that which is taken up will be used to pay down pre-existing debt or will be hoarded. And any of the above means the supply/liquidity won’t result in a return of investment, production, or household consumption levels that existed before the crisis. The economy is already wounded. It will take some time to heal even under the best of circumstances concerning resolving the health crisis.

In short, it doesn’t matter how low the Fed reduces interest rates. Or how much money it makes available for loans. Both business and household confidence may fall so low that cheap and available money is not ‘taken up’—i.e. borrowed. The demand for it may be so low that the supply of money remains unused or is used for activities that don’t actually stimulate the recovery of the economy. This is not theoretical conjecture. It’s what happened in the wake of the 2009-09 crash, when bank lending for small and medium businesses continued to contract for years. It’s what happened in the 1930s as well, when interest rates were virtually zero for years.

Money demand may therefore negate even very large injections of Fed central bank money supply made available for loans. That will offset much of any effort to generate a V-shape recovery. That’s not to say that none of the Fed’s current multi-trillion dollar programs targeting small-medium and even large corporations will have no effect whatsoever. Undoubtedly a good part will be loaned by the banks to businesses in need. Some will be taken up in the form of grants. Grants more so than loans. The Fed may provide direct purchases of business assets and state & local governments’ (municipal bonds) debt. But it will not do so quick enough to ensure a V-Shape recovery. And it remains to be seen how much of the available credit is borrowed for hoarding for emergencies or paying down debt and thus not ever getting into investment, production and consumption sufficient to generate a V-shape recovery. And the historical record of similar deep contractions tells us never enough for a V-shape.

From V-Shape to L-Shape Recovery?

An important characteristic of this economic crisis is that the Fed is attempting to prevent a banking crisis by flooding the banking system with liquidity and money. The crisis is ‘inverted’ in a sense: in 2008-09, it was the financial system crashing that spilled over and brought down a weakened real non-financial side of the economy. This time it is the real, non-financial side crashing that threatens, in turn, to result eventually in a financial-banking crisis. The Fed’s even more massive money injections this time are designed twofold: to bloat the banks with cash and, second, to funnel enough money through the banks, and directly as well, into the non-financial sectors of the economy to prevent defaults and bankruptcies. Should the latter occur in sufficient volume—probably starting in energy and retail and hospitality companies and spreading elsewhere—then these companies will default and go bankrupt in large numbers. That will mean losses by the banks and financial institutions that provided them loans and credit. It could mean thereafter failures of the financial institutions themselves, as occurred in 2008-09 and 1930-33.

The US economy is not there yet. The Fed is trying to head it off. But should it fail to prevent mass defaults, both business, households (credit cards, student loans, auto loans, installment loans, mortgage loans), and local governments alike—then the failures will spread in contagion-like effect to the banking system itself.

Should events and conditions lead to this advanced state of the crisis, then not only is a V-Shape out of the question. What we’ll have is more an ‘L-Shape’ non-recovery for years. And that’s what describes a bona fide Great Depression.

Dr. Jack Rasmus
April 11, 2020

Dr. Rasmus is author of the recently published book, “The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump”, Clarity Press, January, 2020. His other books on economic theory and polic

posted April 13, 2020
On Market Solutions to the Covid-19 Crisis

On a daily basis, Trump tells us what a fantastic job he’s doing, then trots out corporate CEOs before the camera, one after another, each telling us what they’re doing: US auto execs tell us of their plans to convert their idled factories and produce millions of ventilators (while states in desperate need are actually buying them from abroad, mostly China). Big Pharma companies are developing the new vaccine or interim medical treatments like hydrocholoroquinine (which Cuba has already produced and is giving free to Italy); silicon valley tech companies announce contributions of hundreds of thousands of N95 masks (from their offshore inventories purchased from Asia and elsewhere no doubt).

But the reality is that the free market and so-called free enterprise system is largely responsible for much of today’s health crisis. It is the ‘market’ that has given us the massive shortages in hospital beds, ventilators, critical personal protection equipment (PPE), and the long lag in developing interim medical treatments—let alone a vaccine.

Here’s just a few notable cases of how the market has failed and continues to do so:

Hospital Beds

As others have pointed out, before the Neoliberal market system implanted itself in the USA decades ago with Ronald Reagan (deepening and expanding ever since), there were 1.5 million hospital beds in the country and an extensive non-profit public hospital system. Before 1980 there were 100 million fewer US citizens for those 1.5 million beds. Today there are 100 million more Americans, but only 925,000 hospital beds. We’ve added 100 million but reduced beds by 500,000. The reduction, of course, was all done in the name of ‘market efficiency’ by the for profit hospital chains who bought up and then shut down much of the non-profit public hospital system. Now, as the current health crisis deepens, we’re left setting up cots in auditoriums and college dorms and call them hospitals.
The crisis in hospital beds for virus patients can be traced largely to the program of Bill Clinton in 1994 called ‘managed health care’. That program permitted and incentivized the acquisition of the public hospital system by the for-profit chains who sought to reduce competition so they could raise prices. Under Clinton’s program, the for-profit chains were even exempted from US anti-trust laws that might have prevented the loss of half million hospital beds. Hospitals are one of the few industries totally exempt from anti-trust still today.

Personal Protective Equipment (PPE)

Why is the USA so short on ventilators, masks, safety clothing, even disinfectants? It’s because the market solution was to offshore the production of these critical items to Asia, Latin America, and especially China years ago. It was cheaper to move production offshore (experts call this today relocating the supply chains!). It was cheaper to import back these products to the US economy. Expanding free trade (again under Clinton) then made the cost of importing back to the US even cheaper and thus more profitable still. Offshoring and free trade are but two sides of the same coin. Add a third leg to the economic stool: tax laws were changed to provide tax breaks to corporations that actually offshored the production of PPE.

Fast forward and today we have China producing 115 million N95 and surgical masks A DAY! China’s surplus is so great it is giving ventilators and masks to Italy for free. But is the US saying anything about this in Trump’s press conferences? Has Trump ever admitted the availability of these critical PPE materials, ready for import to the US right now! No. Instead, health care providers, doctors, nurses, technicians, are told to re-use their masks and other equipment since there aren’t enough of them to go around. And we’re told by corporate representatives in Trump’s press conferences the materials are coming. Just be patient.

And then there’s the Hydrochloroquinine interim treatment for those sick with Covid-19. Trump mentioned that. But did he say where it was being already used? Some reports are now appearing that the treatment was successfully developed in Cuba, whose doctors have been sent to Italy to administer it there to the most ill patients. But no mention, however, that that treatment is taking place right now in Italy. You won’t hear that ‘non-market’ solution from market unfriendly Cuba from Trump.

Unemployment Benefits

The USA has one of the most miserly unemployment benefit payment systems among all the advanced economies. It provides barely a third of what’s needed to live on. And in many states not even that. In California, one of the more generous in relative terms, the top benefit is $450/wk. That’s about $1,800 a month. But the median rent in urban areas of California alone is $3,000 or more! In New York and other big cities, even more. And the insufficient benefits are paid for only six months.

But if you’re one of the tens of millions of temp, contract, gig workers you’re not considered an employee for the company you’re working for. You therefore are not eligible for even the insufficient unemployment benefits paid in the US.

That has temporarily changed as the US Congress CARE Act just passed. It now provides unemployment benefits for ‘gig’ and other contract workers, albeit for just four months. But the point is this: It’s not the ‘market’ that is helping the millions of gig and other contract workers with at least some benefits. It’s the government. With the CARES Act the government and taxpayer will now pick up the tab for the unemployment benefits for the millions of contract and gig workers that the ‘market’ has failed to cover. The market has allowed companies to avoid paying any unemployment benefits tax that would otherwise cover contract and gig workers. The taxpayer and government now will ‘pick up the tab’. The market failed and the government-taxpayer must clean up its mess and provide the benefits companies like Uber, Lyft, AirBnB and others have avoided and pocketed for themselves.

Health Insurance

In the free market Nirvana that is the USA today, millions of companies are permitted to forego providing their employees health insurance coverage. 37 million have no insurance at all. And 87 million are under insured. Millions with some insurance have deductibles of thousands of dollars per person a year.

Now the Cares Act once again, i.e. the government and taxpayer, is stepping in and ensure these millions—employed and unemployed—have some kind of health insurance coverage. The government is called upon to clean up the mess the market has left.

Paid Medical-Sick Leave

The richest country in the world, the USA, where the Fortune 500 largest companies have managed to distribute more than $1 trillion a year for the past nine years to their shareholders in stock buybacks and dividend payouts, only provides on average 6 paid sick leave days a year to employees. And that’s typically only where a union contract exists. Most get unpaid sick leave or none at all. Get sick, go find another job. That’s the ‘market solution’. In Europe and elsewhere, combined paid leave is typically 30 days or more a year. But not in Trump’s market solution America.

Once again, the consequence is that the government-taxpayer in the CARES Act will have to pick up the tab for paid medical leave for the millions who must stay home due to their Employer’s order, or government ‘stay in place’ guidelines, or school districts shutdowns.

Market Solutions for Worker Retraining

It used to be that companies trained their own workers to become more skilled and productive. There was once a very widespread on the job training culture in the USA. That disappeared as well with the deepening of Neoliberalism and globalization (aka free trade, offshoring, and foreign direct investment by US multinational corps). Under Bill Clinton, corporations were allowed to bring hundreds of thousands of skilled workers from their foreign operations back to the US to take some of the best US jobs. It still continues. Free market efficiency meant it was cheaper (and more profitable) just to transfer workers on H1-B and L-1/2 visas to the US. No need to train American citizens. Cheaper simply to import skilled labor. That was the ‘market solution’ to job training.

The CARES ACT: $500 Billion ‘Socialism for Corporations’

The CARES Act allocates $500 billion just to large corporations. (Another $367 billion to smaller businesses). But do the large corporations really need the $500 billion? And who will oversee the distribution of that largesse?

Take the Airlines. Do they need it for the next 60 days? Do they deserve it?

The airlines are getting $58 billion under the just passed Cares Act. Half of that in outright grants. No strings attached. Another half in loans. Reportedly, they’re now quickly taking the grants but not the loans. Why? They’re probably waiting for Congress to agree to convert the loans to outright grants later in the year.

But no one is asking how much cash on hand the airline companies have as they’re handed these tens of billions of $! And no one is mentioning that the same airline companies in recent years gave their shareholders and CEOs no less than $45 billion in stock buybacks and dividend payouts. So now they’re getting $58B to back fill the hole of $45 billion they gave away to themselves and their big investors (who together owned most of the $45B stock bought back).

Here’s another question unanswered: In recent years big corporations (Fortune 500) earned record profits and paid out more than $1T a year in buybacks and dividends. Under Trump, they’ve paid out a total of more than $3 trillion in buybacks+dividends. In addition to that, in the months immediately leading up to the March 2020 virus crisis, the same big corporations were drawing down hundreds of billions of dollars from their credit lines with banks. At the same time in recent months they have been issuing new bonds and raising billions more in cash. No less than $73 billion was raised from issuing new bonds in February, a record. Flush with mountains of cash from Trump 2018 tax cuts, from their bank credit lines, and from record corporate bond issuance, they now are being given $500 billion more by Congress in the CARES ACT. Do they really need it? Let’s open their books and see before they get even $1.

Not least, there’s the question of who will oversee who gets the $500 billion. The Democrats in Congress say the special board created must oversee. Trump in turn has said, no way. I’m personally going to oversee. Want to guess who’ll win that one?

The point is Big Corporations are loaded with cash. And they didn’t earn most of it from the ‘market’. They got it from Trump tax cuts, from bank credit lines, and from low interest corporate bond issuance made possible by convenient near zero interest loans from the Federal Reserve. Nevertheless, now the non-market sugar daddy, the US government, is giving them $500 more whether they need it or not!

Super-Socialism for Bankers & Investors

The $500 billion going to big business pales in comparison, however, to the multi-trillions that the central bank, the Federal Reserve, is now pouring into the bankers, shadow bankers (i.e. hedge funds, equity firms, investment banks, mutual funds, etc.), and even now into non-bank corporations for the first time as well.

In 2008 the Federal Reserve provided more than $4 trillion to bail out the banks. Now it is providing more than $6 trillion (thus far)—and this time the banks haven’t even failed yet!

The Fed has opened a free money spigot to investors, bankers, and to big business of all types, and has simply declared ‘come on in and take it’. And if the $6 trillion to date isn’t enough, we’ll provide more.

For the first time ever the Fed is now providing free money not only to bankers, but to credit card companies, mortgage companies, corporate bond holders, and even to investors in derivatives like Exchange Traded Funds, or ETFs. Next it will start buying stocks to prop up those markets. Its cousin central bank, the Bank of Japan, has been doing that for years now.

Subsidizing Capital Incomes by Government Not the Market

Both tax policy and central bank monetary policy are supposed to function as general economy stabilization tools, according to mainstream economists. But today that’s a fiction perpetrated by the corporate media. In recent decades, tax and central bank policy ‘tools’ have become virtual conduits for the subsidization of capital incomes.

They have become the vehicles of Corporate Socialism. The Capitalist State and its government takes care of its own. The rest of us will be taken care of by ‘the market’, according to Trump.

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com and hosts the weekly radio show, Alternative Visions on the Progressive Radio Network. Join Dr. Rasmus for daily commentary on developments in the US economy and politics on Twitter at @drjackrasmus.

posted April 13, 2020
The 2020 Great Recession 2.0–Or Worse

A month ago, in late February 2020, I was convinced the recession I have been predicting since January 2019 had arrived. Two weeks ago I began writing this would be another ‘Great Recession 2.0’, as in 2008-09. Now I’m not so convinced of even that. It may be worse, much worse.

US Real Economy Contracting Faster Than 2008 or 1932

Just last week Goldman Sachs investment bank was predicting a -14% contraction of the US real economy in the second quarter, April-June 2020. Morgan Stanley followed with its prediction of a -30% drop in US GDP. Goldman has since modified its initial forecast to -24%.

This compares with the worst quarterly decline in 1932, in the depths of the Great Depression of the 1930s, of -13%. The current contraction, in other words, is coming faster and deeper than any on record previously—whether compared to the 2008-09 Great Recession or the 1930s Depression.

As of the close of March 2020, about a third of the US economy is now shutdown. More is about to follow. The US regions most directly and heavily impacted by the coronavirus—Washington State, California and New York—are where business activity has virtually shut down except for emergency services. Other areas, like Illinois, Texas, and Florida are catching up fast.

Given the spreading shutdowns, focused in states of high concentration of economic production, According to current Federal Reserve central bank governors, the unemployment rate will rise as high as 30%, and quickly, according to St. Louis district Federal Reserve governor, Bullard. Predictions are at least 2 million will be unemployed in March alone, just the first month of the crisis. That monthly unemployment rise also exceeds the worst months of the 2008-09 prior Great Recession.

In short, the real economy in the US has fallen into an economic ‘coma’, as some have accurately called it.

But that economy was already weak and fragile when the virus effect pushed it off a cliff. Already in late 2019, business investment had been contracting for nine months, the manufacturing sector was in a recession, trade was negatively affected by Trump’s 2018-19 trade wars, and household consumption was showing serious signs of weakening. For example, with regard to household consumption, the default rate on credit cards for median families had risen to nearly 9% by late 2019, more than 7 million auto loans had defaulted, and student loan defaults were rising as well (although covered up by clever government re-categorizing of loan defaults). The consumer was not in good shape, in other words, keeping spending afloat largely by credit based spending by the middle classes and by the high end income households’ spending based on inflating stock and financial gains (the wealth effect) and Trump’s massive tax cuts of 2018-19 flowing to their bottom lines.

Then the virus hit the economy like a baseball bat to the back of the head!

Financial Markets Price Implosion

Financial asset markets began to plummet. Artificially boosted for three years under Trump, US financial markets were fueled by Trump’s multi-trillion dollar tax cuts and low interest rates in prior years. That tax and cheap money windfall to business, senior managers and shareholders in turn was redistributed to managers and shareholders in the form of a flood of stock buybacks and dividend payouts. More than $3.4 trillion, in fact, in just the last three years!

The buybacks & dividends were then diverted once again in large part back into stocks and other financial markets once more. The artificial financial asset bubbles grew. But it was all artificial, driven by cheap money and massive tax cut income redistribution to investors, corporations, and the wealthiest 1%.

Under Trump, from 2017 through 2019, stock buybacks totaled more than $2 trillion. It went mostly to professional investors and CEOs and senior managers of companies (In tech companies, the amount of the buybacks going to CEOs and senior managers was as high as 70%, as for example occurred in Apple).

Another $1.4 trillion was distributed to shareholders in the form of dividend payouts. That’s a total of more than $3.5 trillion in tax cut and low interest driven income redistributed to the wealthiest households. Most of this massive income windfall was reinvested in financial markets. US stock markets alone under Trump rose by 25%-35% in just three years. And that’s just about the amount the same markets have now crashed in just one month under the virus’s economic impact!

Crashing stock prices are one key indicator of the onset of a Great Recession, nor a normal one. The same applies to the spread of financial asset collapse to other financial markets.

Already US stocks have contracted by 35%-40%. Oil and commodity futures prices by 40% or more, as the price per barrel of crude has fallen from $70 to the mid-$20s per barrel range. Other industrial commodity prices by 20%-30%. Currencies (aka foreign exchange) worldwide devaluing everywhere, with greatest pressure in India, Asia, and Latin America. Bond markets—corporate and government—have now begun to feel the pressure as well and are beginning to fracture. And bond markets are far more important to the stability of the capitalist economy than are even the stock markets.

As financial asset prices deflate rapidly holders of those assets try to dump them to contain losses. Everyone wants to sell; no one wants to buy. Prices deflate further. Often purchased on margin, by borrowing money to buy more assets during the boom period, ‘margin calls’ require even more selling—and even more financial asset price collapse. Investors become desperate to raise cash to cover their losses. A ‘dash for cash’ overwhelms investor, business, and consumer psychology. As losses exceed the ability to raise cash, financial markets begin to implode. And they are now falling line ‘ten pins’, one after the other.

Pre-Emptive Bank & Investor Bailouts

First stock markets, but in the past month, repo markets where banks loan to each other; then commercial paper markets and money market funds; then municipal bond markets; and residential mortgages; and leverage loans (junk loans); and, behind the scenes and intensifying, high yield (junk) corporate bonds and so-called BBB investment grade corporate bonds.

The latter junk corporate bond + BBB market in the US alone is valued at $6 trillion. Leveraged loans another $1.2 trillion. Muni bonds $4 trillion. Residential mortgages $11 trillion. All in trouble now. Plus Repos, Commercial Paper-money funds, and so on as well.
And let’s not forget oil-commodity futures global price deflation, collapsing emerging market economy currencies, and even growing troubles in national government bonds like US Treasuries, Gilts (UK), Bunds (Germany) and others, many of which were already trading in negative rate territory.

In short, the generalized financial markets collapse was a defining characteristic of the 2008-09 financial crisis. And it’s returned now with vengeance.

Also returning is the desperate effort by the Federal Reserve (and other central banks worldwide) to stuff the growing black holes in banks, shadow banks, and corporate balance sheets with new liquidity (money injections) in order to try to prevent defaults and bankruptcies. A bank-corporate bailout has already begun—even before the banks fail. It is pre-emptive in 2020, unlike ‘after the fact’ as in 2008. Banks have not yet crashed and are being bailed out!

The Federal Reserve in one week in mid-March injected $2.2 trillion in the form of $1.5T for the repo market and another $700 billion in Fed direct purchases of mortgage bonds and investor held Treasuries. It followed with unlimited further money to stave off collapse of the commercial paper-money market funds, the muni bonds, mortgage bonds, and reportedly to back up credit card and auto finance companies from their anticipated losses. The Fed also announced it would ‘swap’ US dollars for foreign currencies of other central banks in order to help their economies. The Fed has committed to $4T more in money injections to banks. And that’s in addition to the $2.2T already committed.

In other words, bankers will be bailed out $6.2T, and that’s probably just a start. That amount compares, by the way, to approximately $4.5T used to bailout the banks in 2008-09.

What about non-bank companies? They received a ten year Trump tax cut in January 2018 of no less than $4.5 trillion! They were then awarded with more tax loopholes in 2019 equal to $427 billion more. Now the Republican Senate in the US Congress is proposing another $500 billion with virtually no strings attached.

Yet Another Windfall for Non-Bank Corporate America

In contrast, the fiscal spending stimulus for Main St. and middle-working class families totals about $500B in the pending 2020 crisis recovery bill. It includes a one time cash rebate to households of $3,000 but no increase in unemployment benefits thereafter. It’s clearly a 30 day emergency package, even though the impact on the US economy from the virus will be for months to come.

The US economy generates $1.7 trillion in spending every month. The $1 trillion fiscal stimulus package coming from Congress will thus replace barely half of the lost spending by the US economy.

Big corporate interests and politicians in Washington DC know the depth of the current economic crisis—financial and real. They’re providing for the bankers and investors to the tune of $6.2 trillion, with an open ended checkbook for more if necessary. But they’re only providing for a one month bailout of Main St.

Already Trump is tweeting this package will be reviewed in 15 days. He’s thinking short term. So too are other politicians. Their media is pushing the theme that ‘maybe the economic costs are too high for the cost of the death rate from the virus’ that will occur. Politicians like New York governor, Cuomo, are raising the question, signaling the debate now rising within the economic and political elite; they are preparing the public. They are getting ready to trade off human lives for their economy. They are preparing to send people back to work after a month, regardless the health consequences. They fear economic collapse and their loss of incomes more than the virus and its destruction of American lives.

Trump may soon decide to announce “let them go back to work”. An echo perhaps of Marie Antoinette’s infamous line as her citizens were dying too: “let them eat cake”.

In short, we are now about to see that people’s lives are expendable, for their profits, income and wealth that are not.

Check out Dr. Rasmus’s predictions since Sept. 2018 on recession and current events on this blog. And concluding chapters from his books, ‘Systemic Fragility in the Global Economy’ 2016; ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’ 2017; ‘Epic Recession: Prelude to Global Depression’ 2010; and the most recent ‘The Scourge of Neoliberalism’ 2020. For day by day and hourly commentary, join Dr. Rasmus on twitter at @drjackrasmus, and listen to his weekly radio show commentaries in depth as the crisis unfolds, at http://alternativevisions.podbean.com.

posted March 26, 2020
US Senate’s Fiscal Stimulus Bill: What It’s Not Enough

Just after midnight March 25, 2020 eastern time the US Senate passed a compromise bill of fiscal spending to address the accelerating economic decline. Both Democrat and Senate Republican leaders agreed on the terms. US House of Representatives Speaker, Nancy Pelosi, indicated she would rush approval of the package seeking a unanimous voice vote of the House.

Here’s what the terms of the stimulus package looks like, according to initial summaries by the Washington Post and CNN released within minutes of the bill passage:

Middle class and worker households would get $500 billion in the form of direct checks ($250B) and increased unemployment insurance benefits for the next four months ($250B)

Corporations and businesses would get $867B–$367B of which would go to small businesses, and another $500B to large corporations like airlines, defense companies, cruise lines, hotels and other companies.

Additional funding of $130B would go to hospitals to purchase needed medical supplies. State and Local governments get $150B. Other funds would be provided by the government’s Small Business Administration ($10B) to help pay their debt. Reference is made in the package as well for another $20 in farm bailout, raising that total from the $30B spent to date during the US-China trade war to $50B. While it appears the $130B for hospitals and $150B for local governments is in addition to the $867B to business and $500B to households, it’s not clear if the $20B farm bailout and $10B additional SBA are included in the $867B or not.

Here’s a further detail in breakdown of these amounts:

$500B to Business

The Airlines get their $58B they’ve been lobbying for. And if past breakdowns still apply, it means roughly half the $58B will take the form of outright grants, not loans, to the airlines and the remainder as loans. It is also unclear if the loans will be ‘forgiven’ after six months, as had been proposed before in past versions of the Senate bill.

Another $17B of the $500B is earmarked for defense companies considered important to national security. No details are released who these are and why such companies, not affected by consumer demand, should receive such an increase. (Possibly to back fill money that has been transferred from them by Trump to help pay for his wall).

Trump has also indicated he intends to have some of the $500B go to cruise lines and hotels which, along with airlines, are critical to his own company’s business.

The remainder of the $500 is designated for spending to support other industries. Whether in the form of loans, grants, or other forms of assistance is still unclear.

$367B to Small Business

The Senate bill always included $350B in loans for small business, and the provision that the loans would change to outright grants if used to pay wages and payroll costs. It won’t take clever accounting to use the $350 to cover wages and compensation (and payroll taxes, etc.), as companies move the money that would have been used for such purposes to other areas of their income statements. So consider the $350B as money without repayment—i.e. not a loan.

In addition to the $350B, another $17B is added now for small business to cover interest on their existing loans for six months. Finally, there’s the $10B from the Small Business Administration to help pay debts, which may or may not be part of the other totals.
Add in the $20B for farm support, the $10B from SBA, and the $130B to hospitals, it means Business Large & Small thus get $1,027B in direct assistance by the government in the new agreed on Senate-House stimulus package.

Another item that the Democrats demanded and received in part was to have an Oversight Board to review how corporations and businesses actually spent the government money. In the previous emergency economic recovery legislation in 2009, much of the direct assistance was ‘gamed’ by businesses that received it. Some even used it to buyback their stock and award bonuses to managers. The Oversight Board is supposed to prevent that. It remains to be seen, however. Who will be chosen to manage the Board will make all the difference. It can be assumed the Republican Senate or Trump will choose corporate-friendly Board members. As Trump has said publicly when asked who will ‘oversee’ the distribution of the funds to business, he replied “I’ll be the oversight”.

Middle class families and workers get a total of $500B under the agreement, which is what it was before. It appears that the money was just ‘moved around’.

Direct Household Cash Assistance

Talk of $3,000 per household is now changed to a check of $1,200 for a single household member, or $2,400 for married couple, plus $500 per child. (It’s unclear if that’s for all children in a family or just up to two).

To qualify for the full $1,200/$2,400 an individual must make no more than $75,000 income annually. Income above $75,000 phases out until $99,000 after which no payment is made. For couples, the phase out is at $199,000 per household.

Increased Unemployment Insurance Benefits

The package includes an increase of $600 to the state’s defined level of unemployment benefits paid (that vary by state quite a bit). But it’s unclear if the $600 applies to the highest paid state benefit payment or to all levels of state benefit payments. For example, in California the top payment is $450/week. The new payment would be $1,050/week. But will those below the top payment level also get $600?

A plus to the unemployment insurance provision is that it will also apply to contingent work: that is, to part time, temp, contract labor not just to full time employed who are laid off due to the effect of the virus on company shutdowns.

On the negative side, all the improvements in unemployment insurance will take effect for only 4 months, then will expire.

It is clear, therefore, that middle class families will receive only the $500 billion that had been allocated before—in the form of cash assistance one time worth $250 billion and improved unemployment benefits for four months costing another $250 billion. It appears some of the cash assistance was redirected toward improvement in unemployment insurance benefits, but no net increase in the total $500B on the negotiating table before.

In other words, in the final stimulus bill businesses get more than twice as much as do households and the working class!

State & Local Governments

An additional $150 billion is allocated in the bill to assistance to state & local governments.

    THE TOTALS

The totals in spending thus appear to be approximately $1,650 billion! It is being reported as a $2 trillion stimulus effect and increase in US GDP overall. AS Trump’s advisor, Larry Kudlow, has said on a previous occasion, the $2T represents the spending plus the ‘multiplier effect’. $2T is not therefore the actual spending. That is less, around the $1,650T estimated here. The difference is a multiplier effect of about $400B.

But that’s a generous estimate of the multiplier. It’s based on normal economic conditions. And the current collapse of the real and financial US economy is anything but normal. The multiplier will be much less. That is because much of the spending by the government, to business and households alike, will be used to pay down debt, hoard the money due to expectations of future profits and employment insecurity, or to cover price gouging by businesses selling necessities.

The US economy spends monthly the equivalent of $1.7 trillion. The Senate’s stimulus package is thus a one month stop-gap at best! As this writer has been arguing in recent days, the stimulus needed to get through the summer will have to be $4 trillion, not $1.65 trillion.
The $2 trillion (spending + multiplier) is estimated at around 9% of US Gross Domestic Product, GDP, at present. A 20% increase of GDP is necessary, raising total government spending in GDP terms from the roughly current 21% of GDP to 40%.

40% of GDP is what the US government raised spending to in 1942, when we went to war at that time. It was an increase from around 15% pre-war. If the fight against the new enemy, the virus, is a kind of ‘economic war’, then the US will have to mobilize its economy again on a war footing. Trump’s activation of the War Production Act, and then doing nothing about it further, is not a war mobilization. Trump is not a ‘war president’, as he claims. Indeed, he allowed the enemy to actually penetrate our shores and spread amongst us with his delayed action to stop airline travel and cruise travel. It’s not an accident that the largest concentrations of the virus infections are in our coastal ports and airports—Washington state, California, New York, and now increasingly New Orleans, Philadelphia, Chicago and Miami.

Trump as ‘War President’ & Other Fictions

Unlike our prior war presidents, Roosevelt and Truman, Trump is not mobilizing production and distribution of key resources and supplies to fight the enemy. He simply asks the private sector to do it and then gives his daily ‘sales pitches’ to the nation press conferences to say what he’s doing when he’s not actually doing it. War supplies (masks, ventilators, PPE) are promised and promised but are slow to appear, if they ever do.

The question follows then whether the current Senate-House stimulus bill represents a sufficient stimulus to protect the US economy. The answer is no. It’s not even half way there for Main St.

In contrast, however, the Federal Reserve US central bank has quickly allocated no less than $6.2 Trillion so far to bail out the banks and investors, even before they fail this time. And promises to do more if needed and for as long as necessary. It is writing a blank check for the bankers and investors.

Meanwhile Congress provides one-fourth that, and only one third of that one fourth, for the Main St., workers, and middle class families.

Finally, it is clear from Trump’s statements in recent days that he knows this stimulus is only a one month hit to the economy. That’s why he—and the capitalist investors who have been lobbying him hard the past week—are turning up the message we should all start going back to work by mid-April.

As Trump put it, the timing is ‘beautiful’, at Easter. But it won’t be so beautiful when a surge in infections and death occur on top of the current surge underway occur by early summer.

But profits and money are more important to this wheeler-dealer, commercial property speculator capitalist in the White House. With the US budget deficit this fiscal year almost certainly to exceed $3 trillion, and his election looming on the horizon, Trump and friends see Wall St. and US business interests as more important than the rising death rate that is inevitable should we return to work prematurely by mid-April. Such action will all but ensure the eventual overwhelming of the US hospital system three months from now, an even higher death rate, and an even greater collapse of the US economy and financial system in the aftermath.

Trump may think he’s at war with the coronavirus, but it is the virus that is winning! And his poor generalship is aiding and abetting that enemy. Unfortunately, the American public—and especially the old and infirm—are becoming the ‘cannon fodder’ in Trump’s phony war.

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

posted March 17, 2020
Economic Recovery Proposals: Theirs & Mine + How to Finance My Plan

The Coronavirus has been wrecking the US and global economies. While focus has been on addressing the biological devastation wrought by the virus, the economic devastation keeps growing.

Failure to properly address the deepening economic impact of the coronavirus has been no less shocking to date than the obvious failure of politicians and policymakers to get a handle on the medical-human impact of the virus.

Trump had called the virus a ‘hoax’, said it would be over by April, declared publicly there were millions of test kits being used when there weren’t, and blamed first the Chinese then the Europeans for the obvious spread of the virus, and rising death toll, in the US.
His answer thus far to the spreading and deepening economic impact of the disease has been to demand US Federal Reserve bank chair, Jay Powell, to drop interest rates further plus advocate a payroll tax cut across the board—the latter a measure that economists almost unanimously say will have no stimulus effect on the economy. Even his own advisers, Steve Mnuchin & Larry Kudlow, reportedly have advised against the payroll tax cut. The payroll tax cut was first enacted under Obama to try to stimulate consumption in the wake of the last 2008 economic crash. It is generally acknowledged not to have had much, if any, effect on economic recovery.

How the Virus is Crushing the Economy

There are at least four major ‘channels of contagion’ by which the virus is driving the contraction of the US, and global economy:

1. Global Supply Chain Disruption

This was the easiest to see. Intermediate and final goods exported from China to the US were halted in many industries. US production began to cut back on final goods delivery in the US economy, already affected by Trump’s trade war with China during 2018-19. Not only goods from China to US directly. But supply chains in which Japan and So. Korea goods, made in China and delivered to those countries, would otherwise be shipped to the US. Or goods shipped to Mexico and then exported as final goods to the US. Or from Asia to Europe, and then to the US. The net effect was a significant drop in US production and therefore sales and the output of the US economy in general. But that channel of contagion is now being dwarfed by another.

2. Collapsing US Consumer Demand

We can see this now spreading and deepening rapidly throughout the US economy. First demand for travel related spending: airlines, cruise & shipping, hotels & leisure, entertainment, etc. were initially impacted. But that’s been spreading to other industries as rapidly as the virus itself. Personal services of all kind are coming to a halt, except for healthcare. Restaurants and bars are shutting down. Education is being driven to an online underground. Malls and stores are virtually deserted. Social entertainment, including sports, is suspended everywhere. Even grocery stores are experiencing empty shelves, and consumption in basic necessities will soon fall off. Then there’s online purchasing, now developing huge backlog and delivery problems.

The consumption sector is coming to a halt in industry after industry, and it’s not over yet. Social distancing required by the virus to slow its spread is, conversely accelerating the spread of the economic impact.

Consumption was the only sector of the US economy in late 2019 holding it up. And it was slowing in that regard as well by year end. Now it is collapsing. Nearly 70% of the US GDP and economy, it is now joining the contraction in business investment and trade that was occurring throughout 2019.

The recession is here, as of March 2020, folks. The only real question now is how deep will it go and how long will it last! And that question depends, in turn, on how quickly and seriously will US politicians respond. And the actions thus far do not portend well for a prompt ‘v-shape’ recovery.

But there is yet a third channel of economic contagion emerging that may dwarf the effect of the supply chain disruption and household consumer demand collapse. It is the condition of the financial system itself.

3. Financial Markets Deflation & Default

Globally and in the US financial markets are churning and fracturing, with a net effect already of having deflated by more than 20% and in some cases 30% or more. Not just stock markets. But oil and commodity futures markets. Foreign exchange currency markets. Corporate bond markets, which are far more important to capitalist economies than stock markets, are showing signs of great stress, to put it mildly. Especially unstable are markets for what’s called junk bonds (especially in oil fracking, retail, and travel & leisure). And what’s called ‘junk loans’—i.e. leveraged loans. In the US the total at risk is a combined more than $7 trillion. Add to that the fact that banks globally are sitting on $10 trillion in non-performing loans. Should prices collapse further, widespread defaults on paying principal & interest on debt will take place. That will result in mass layoffs once again, as in 2008-09; a further collapse of business investment; and a yet further acceleration of contraction of the real economy.

It’s not coincidental that the US central bank, the Federal Reserve, last week pumped an extra $1.5 trillion into the banks via what’s called the Repo market, plus more through traditional bond channels, and is planning in a couple days this coming week to drop interest rates to near zero and re-institute special funding once again, as in 2008, to bail out mutual funds and other ‘shadow’ (i.e. unregulated) banks. Why? Because liquidity is rapidly drying up throughout the economy as businesses drawn down their bank credit lines to zero as well, in order to hoard cash to weather out the storm of consumption and production collapse on the horizon.
The financial markets collapse, the 3rd channel, may prove to have the greatest devastation on the now already recession hitting the US economy. What began as supply chain and household demand problems will be greatly exacerbated by the financial instability.
Is Trump and the politicians preparing for this economic contingency? No, not at all.

Here’s what Trump and even the Democrat leadership (Pelosi-Shumer) are proposing:

Trump’s Failed Economic Stimulus ‘Program’

In the middle of last week Trump addressed the nation on TV and proposed the weakest possible response. It was so weak even investors reacted with a 2,200 point fall in the stock market. There were basically three things Trump proposed:

First, a $50 billion increase in the small business administration loan fund. A hint of some kind of tax deferral extending the normal IRS April 15 deadline. And, third, a payroll tax cut costing the social security trust fund a hit of at least $800 billion.

He then revisited that paltry proposal on Friday, March 14. He proposed an apparent additional $50 billion for the states to spend on emergency measures to address the spreading virus. He clarified the tax deferral would be only for ‘some’, not all. He added a suspension of interest on student debt. But failed to explain if that meant a full waiver of debt for all students, or just a temporary halt to paying interest, which would nonetheless continue to accumulate and for which students would still have to pay later after the suspension was lifted. Trump also added the proposal the US would buy more oil from US producers to fill the US strategic reserve. That was to help oil companies experiencing revenue loss from oil prices falling to the low $30s per barrel. Trump’s statements to the press indicated he still wanted the payroll tax cut, even as the Democrats were saying ‘no way’, it won’t have any effect except to further destroy social security funding.

Pelosi & Democrats Blocked Stimulus Program

As Trump was prevaricating and dribbling out minimalist economic responses to the cratering US economy, Pelosi and the Democrats were trying to address the real scope of the problem, even if not as broadly required as well.

Intense discussions were being held behind the scenes between Pelosi and Trump’s Treasury Secretary, Steve Mnuchin. All that came out of that negotiation by Friday, March 14, however, was an agreement to provide free testing of the virus. But how ‘free’ was defined was not all that clear. Did that mean those sick would have to pay out of pocket and then get reimbursed by the government. If so, millions will hold off getting tested. More than half US households have less than $400 for emergencies, according to the Federal Reserve’s own data research. They can’t afford to get tested.

Pelosi and the Democrats had also been proposing paid medical leave of 14 days, tax credits to small business to help pay for the leave, an increase in unemployment benefit payments in anticipation for all those, maybe not sick, who would soon be laid off or asked by their employers to stay home (on unpaid medical leave). Pelosi &company, to their credit, also refused to cut payroll taxes. They know of Trump’s leaked plans to cut social security and medicare after the November elections.

While there are some good provisions in Pelosi’s proposals, the Democrat economic stimulus doesn’t go far enough as well to address the scope and magnitude of the negative economic impact that’s coming to the US economy: as it shuts down in broad industries and should the financial system crack as it did in 2008.

Furthermore, it appears that both Trump and McConnell in the Senate are intent on doing their worst to refuse to agree on most of the proposals in the Pelosi plan; demanding in particular acceptance of a payroll tax cut in exchange for other proposals. So don’t expect anything big or effective in any agreement coming this week. Trump is determined not to have an effective fiscal stimulus, now that his budget deficit last year exceeded $1 trillion—and that his current budget deficit after only five months is running at a rate of $1.4 trillion for this year.

An economic stimulus must focus on government spending and income restoration. It cannot focus on tax cutting. Nor on interest rate reduction. Neither of those kinds of policies will stimulate investment or consumption. Why? Because there’s a massive shift to hoarding cash underway by business and consumers will not get relief quick enough, or at all if they’re unemployed.

Businesses is selling its financial assets across the board to gather in as much cash as possible, needed to continue to pay interest and principal on its $10 trillion debt run up since 2008, as its prices, sales and revenue drop precipitously in the meantime. There’s a ‘dash for cash’ underway. And no amount of tax cutting will lead to re-investing in production. The tax cuts will simply be hoarded and not spent. Ditto for households and consumers. Any payroll tax cut will be hoarded, not spent, to ensure households have enough to continue paying mortgages and car loans and student loans—assuming they still have jobs. If no jobs, it will be spent on trying to maintain current consumption, not increase it.

The same applies to interest rate reductions by the Fed. Why will businesses borrow even at a lower rate to expand production, when consumers are buying less of their goods or if they can’t get parts from abroad with which to build the goods? And why would households borrow to take the risk to purchase a new auto or even a new home given the current direction of the economy? Cutting the costs of business investment is now the least important variable determining the outcome of investment. Expectations of a collapsing economy and thus falling profitability is what’s driving investment now—and the anxiety of being able to continue to pay for debt accumulated in recent years in order to avoid default.

Yet that’s what exactly Trump will propose: more tax cuts, for business especially, and lower interest rates. It will prove throwing money down a rathole.

MY PROPOSALS FOR FISCAL SPENDING ECONOMIC RECOVERY
(March 15, 2020)

Make no mistake. The US is now in recession. And it will deepen considerably before it is over. Moreover, the great risk is now a spreading crisis of credit, a fracturing of the financial system as in 2008-09, and the potential emergence of another ‘Great Recession’, this time even worse than 2008-09. All the efforts by the Federal Reserve and other central banks to pump trillions of dollars more into the US and their economies may prove futile this time around.

What’s needed is an immediate restoration of consumer household spending power and a protective floor under incomes that may soon also collapse should mass layoffs emerge once again in another couple months. Here’s some measures, a necessary short list, expanding on some of my earlier proposals, to provide that immediate income effect:

I. Paid Medical Leave

A 14 day paid medical leave until vaccines for the virus are generally available, eligible for:

· Those tested with virus
· Those with symptoms
· All those Parents of K-8 students forced to remain home due to school closures

The 14 day paid leave should be renewable by state legislatures’ decision since the economic impact, nor the recovery from the virus, will not occur evenly across all states

II. Company Reimbursement for Paid Medical Leave

· Paid Medical Leave costs should be reimbursed by the federal government to companies with fewer than 500 workers. Reimbursement by tax credits for companies with more than 50 employees; and by means of direct subsidy payments for companies with fewer than 50.

· 50% reimbursement to companies with more than 500 workers by means of tax credits provided the company shows a full restoration of jobs for those laid off within a year of the development of a vaccine for the virus.

· Paid leave shall not result in a reduction of paid sick leave provisions already provided by a company or by union contracts, which shall otherwise remain accrued to workers

III. Employment Guarantees

· Employers are required to restore workers on paid medical leave, who return, and to their former position, pay and benefits.
· All other benefits shall continue to accrue for workers while on paid medical leave

IV. Hospital Testing & Related Costs

· Costs for hospital-clinic-doctor office entry and testing will be billed by the health provider directly to the government, not paid by the worker and then reimbursed

· Provider costs associated with the visit for testing (i.e. labs, emergency or other room charges, out patient, in patient, etc.) will similarly be billed by provider to the government

· Return or follow up visits if needed will be billed directly as well

· Pharmacy and drug costs are waived for patients determined to be infected by the virus, and all their immediate dependents under age 21, or on Medicare, Medicaid, or otherwise uninsured.

V. Health Insurance Companies Responsibility

If a worker is insured and on medical leave, or if otherwise laid off due to the economic effects of the virus on their company of primary employment, the health insurance provider shall waive the worker’s share of monthly health insurance premium. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program

· If a worker is insured, or if otherwise unemployed due to the economic effects of the virus on their company of primary employment, the health benefits insurance provider will waive all deductibles and co-pays for services for those determined infected or on leave due to school shutdowns. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program

· Premiums, deductibles, copays and coverage shall remain frozen until the State legislature declares the virus effect is declared over
· State legislatures shall review all insurance company requests to raise rates after the virus effect is over for the next 3 years.

Attempts to recoup costs during the virus period by accelerating price increases or reducing coverage will be denied if greater than the rise in the local consumer price index for the urban region.

VI. Medicare & Medicaid

For those employed while receiving Medicare coverage, the monthly Medicare deductible payment shall be waived until the vaccine for the virus is made available

For those employed while receiving Medicaid, all doctor or hospital costs to the employee or unemployed shall be paid for by the State’s Medicaid authority. All doctors and hospitals shall be required by law to accept Medicaid patients until the vaccine for the virus is made available.

Refusal by doctors, hospitals or clinics to accept Medicare or Medicaid patients will result in fines levied on the health provider’s annual federal tax payment

VII. Unemployment Benefits

· The federal government shall immediately extend unemployment benefits for all layoffs for an additional six months (one year total), effective as of March 1. 2020

· Companies shall be required to continue to pay unemployment benefits taxes to their states for laid off workers for up to a year, commencing March 1, 2020.

· There shall be no suspension of the Social Security 6.2% payroll tax or Medicare 1.45% tax by companies.

VIII. General Company Requirements

· For the duration of the virus crisis period, companies shall be required to continue to pay their workers’ health insurance monthly premiums if laid off, for a period of six months from date of initial lay off

· Banks shall be required to provide lending to business customers at interest rates no greater than the original loan, if extended; or for initial loan, no more than the average rate for the local urban area in which the company is located

· Banks and mortgage companies shall institute immediately a moratorium on mortgage payments for those on paid medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returning to work, whichever is sooner

· Auto companies’ financial services, credit unions auto financing, and other sources of financing of vehicles shall introduce a moratorium on monthly auto loan payments for those on medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returning to work, whichever is sooner

IX. Federal Student Loans & School Districts

· For college students who work, but are laid off due to economic effects associated with the virus at the company or institution for which they work, student loan principal and interest payments shall be suspended until returning to work. Suspension shall be defined as permanent waiver of all interest charges. Such interest payments shall not further accrue.

School districts that shut down shall continue to receive per pupil reimbursement from their states on the same schedule as when students were attending sessions

X. Food Provisioning & Delivery System

K-8 students who were receiving meals while in attendance at their school, but are not so doing due to school shutdown, shall continue to have meals delivered to their primary residence daily. State programs providing ‘meals on wheels’ for elderly residents or similar programs shall be expanded to cover K-8 students

All former cuts to the SNAP (food stamp) program since January 2017 shall be restored for all those eligible on paid medical leave, leave from work due to school shutdowns, receiving unemployment benefit payments, or on Medicare or Medicaid

Federal & State governments shall undertake whatever measures necessary to ensure the physical delivery of food to local grocery outlets, and to remove bottlenecks to online ordering and delivery of food and necessary household items to residents or local distribution centers, including if necessary mobilization of state national guard units and requisitioning temporarily of private delivery company facilities and equipment

HOW TO FINANCE MY FISCAL PROPOSALS

(March 16, 2020)

Some friends have asked how much would my own fiscal-spending based ‘Economic Recovery Program’ just released earlier today cost? The total cost can’t be quantified exactly, as the impact on working families is spreading rapidly. But here’s some financing, administrating, and implementation principles associated with my proposal:

* First, the amount of financing applied in its first phase should be no less than the same amount that the Federal Reserve bank has already allocated to spend on the banks and investors. That’s $2.2 trillion in just the last week. So if we can spend that on the bankers, why can’t we allocated the same funds to bail out workers and the middle class. Index that $2.2T to whatever further increases the Fed spends on its pre-emptive bailout of bankers and investors already under way. If the Fed can ‘create $2.2 trillion’ out of thin air to give to bankers and investors, why can’t it do the same for Main St. and working families?

*Second, use some of the money to enroll those without health insurance or whose insurance will not cover the costs of health services, apart from the actual tests only, in the Medicare system. Introduce a one page sign up for Medicare online. Create a special ‘temporary’ membership category. Have healthcare providers bill Medicare for the tests costs to workers, and for all other related costs, as well as costs for those on unpaid medical leave or unemployed due to the economic effects of the virus on the economy-i.e. economic layoffs. Immediately enroll the 30 million uninsured. Voluntarily enroll the 87 million who are under-insured with massive deductibles, copays, with no dependents covered, etc. Immediately allocate funds from the $2.2 trillion to bail out Main St. and transfer the allocated funds to the Medicare-Social Security Trust Fund. And hire as many workers in the Medicare administration as needed.

*Third, instead of reimbursing companies for continuing paying wages to workers sent home on unpaid leave, or who are laid off because of the major economic impact that’s coming (there will be mass layoffs starting in May), why not have the government ‘hire’ the laid off for the duration of the crisis–which today Trump admitted will likely continue through August. Adapt the unemployment benefits system to make the payments to those so covered. This would be a 21st century, electronic administered ‘Works Progress Administration’ that provided 8 million government jobs to the unemployed.

The administrative apparatus is there already: Medicare and Unemployment Benefits. Why not use it. And make it clear it is the government that is providing their health care and employment protection–not the private employers or bankers who would otherwise cut them loose to scramble individually to protect them and their families.

*Fourth, immediately create a ‘Public Investment Corporation‘, funded and managed by the government (Federal, State & Local) to invest in alternative energy expansion and other climate crisis mitigation that would hire workers, since the current crisis will mean private business investment will collapse across the board and such much needed investment from the private sector will not be forthcoming for some time.

Let the Federal Reserve pre-emptively bail out its bankers and billionaire private investors! But if they can spend $2.2 trillion, then the government can, and should, pre-emptively bail out Main St. as well for no less!

Further economic measures will be needed to address the current US recession, and the increasing possibility of the recession morphing into another ‘great recession’ (or worse). But the above represents an initial phase of immediate fiscal spending response in the short run to restore incomes being devastated right now.

Dr. Jack Rasmus

Jack Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

posted March 17, 2020
Trump’s DOA (Dead on Arrival) TV Speech

Tonight, March 11, Trump gave a TV address to the Nation that was to be his program for mobilizing the country to address the growing spread of the Covid-19 virus and its increasing negative impact on the US economy. The proposals landed with a thud. Even the financial markets gasped and went into a tailspin. The Dow Jones stock futures market immediately went into a tailspin, falling 1250 points again even before the markets reopen tomorrow morning, Thursday March 12.

Not only the financial markets, but the rest of the real economy is declining rapidly. The US stock markets now have officially entered ‘bear’ territory, having lost more than 20% in value. That has nearly wiped out all of Trump’s much vaunted stock market gains since he came into office.

Subsidizing Stock Markets with Tax Cuts & Interest Rates

The markets under Trump have been artificially boosted since he assumed office. First by expectations of his 2016 campaign promise he would deliver a $5 trillion business-investor tax cuts immediately once elected. Secondly, his delivering on that promise in January 2018 with his $4.5 trillion tax cut for multinational corporations, businesses, and investors. (To this was added a further $427 billion in business-investor tax loopholes in 2019). And third, as a result of Trump forcing the Fed to reverse course and lower interest rates in 2019 as well.

Working and middle class households end up paying $1.5T in more taxes under as a consequence of Trump’s 2018 tax cuts. That boosted already record profits to still higher profits. For example, 23% of the 27% rise in the Fortune 500 companies’ profits in 2018 were attributed to the Trump windfall tax cuts alone. Flush with record profits, the same Fortune 500 redistributed their profits bonanza to their shareholders. They gave back to shareholders $1.2T in stock buybacks and dividend payouts in 2018, plus another $1.2T in 2019. Most of the $2.4T went right back into the stock markets, driving their price levels still higher.

But that wasn’t all. Added to Trump’s subsidization of Corporate America by means of tax cuts was the subsidization of Banking America. Trump browbeat, threatened and successfully forced the US central bank, the Federal Reserve, to provide cheaper money once again to America’s bankers by lowering interest rates three times in 2019. The cheaper money led to loaning out more to investors, more cheap money to speculate in stock and other financial markets. Cheap money also served to drive up stock prices even more in 2019.

In other words, under Trump tax policy and Trump monetary policy have been in the service of the stock markets ever since he came into office. The tax and interest rate policies artificially pumped up corporate profits, that in turn boosted corporate stock buybacks and dividend payouts to record levels that then enabled the diverting of much of those buybacks-dividends cash into the stock markets. In the end it created an artificial stock market boom.

But it all came crashing down in 2020. After risen for three years, the markets crashed 20% in just three weeks. And another 20% is likely yet to come.

Accompanying the stock market crash has been the collapse of other financial asset prices in the US and worldwide. Stock markets globally have followed the US down. Oil and commodity futures prices have tanked. Oil has fallen into the low $30s per barrel, flirting with the $20s. Ditto other commodity prices. So have foreign currencies. Ditto the US Muni bond market. And corporate junk bonds in the energy sector are well on their way to mass defaults, followed by retail and other high yield bonds.

Meanwhile, the real non-financial economy in the US and globally fare no better. Already slowing before the virus’s impact on global supply chains and domestic demand, only the US household consumer was holding up the US economy at year end 2019. That has now changed dramatically in 2020, however. All the indicators of the real economy are now in freefall too—not just the financial markets.
The US recession, in other words, has arrived as of March 2020. The same recession is spreading now globally: in Europe, So. Korea, Japan, Latin America, Australia, and by many independent forecasts, China perhaps soon as well. Goldman Sachs research is projecting a second quarter 2020 US growth rate of zero. Others are forecasting a China growth between 2% and -2%, depending on the source. In other words, half of the global economy—the US and China—are about to stagnate at best and more likely contract now—as the rest, even weaker, economies in Europe, Japan, Latin America and elsewhere slide even deeper into recession.

So there’s a globally synchronized real economic contraction underway (aka recession), as well as a spreading global contagion of deflating financial asset markets. The last time financial markets and the real economy were similarly synchronized was 2008. But this time the financial price collapse is the fastest on record.

Trump’s DOA TV Address to the Nation

It was in this economic context that Trump came before the cameras tonight, March 11, to tell the nation what he was going to do. But his answers were not well received—by business, the media, and I’m sure the vast majority of Americans looking for leadership and a convincing program. Nor was his delivery convincing. He appeared wooden, subdued, unconvinced of his own words, and, of course, he contradicted himself repeatedly in typical Trump fashion.

Just one week ago he declared publicly that the virus was not a problem in the US. He said only 15 cases had been recorded and that number was going to zero soon. It would all disappear by April when warmer weather returned. Last week he said 43 million test kits for the virus were being distributed. And that everyone should make sure they go to work and carry on life as normal.
But tonight he did not challenge the fact of more than 1200 cases in just one week, and 38 deaths, with both numbers rising rapidly. Instead of ‘going to work’, he reversed himself and said “if sick, stay home”. And normal life, he said, now means not traveling, no mass events or gatherings, closing schools.

Nor did he mention why California governor, Gavin Newsom, complained today that many of the test kits sent to California have been defective and that the most recent kits received by California were sent without the biological ‘reagents’ necessary to make the kits work. As a result, 2500 travelers disembarking today from the Grand Princess cruise ship now docked in Oakland, California were not tested as they left the ship unless they showed direct symptoms of the virus. In other words, thousands were being sent on their way even if they were asymptomatic carriers of the virus because there just wasn’t enough working test kits. Nor did Trump mention New York governor, Cuomo, who has had to shut down entire communities in New York because of insufficient test kits. Following Trump’s speech, Cuomo today on CNN TV added “we don’t have testing capacity…We are way behind on testing”.

And of course Trump would never say that in four weeks the US has tested fewer than 10,000 nationwide, in contrast to China’s testing 200,000 in a single day or South Korea 15,000 in a day. Nonetheless, according to Trump, the US had carried out an “unprecedented response”, and was “responding with great speed”. Trump’s speech was typical ‘reverse hyperbole’. To refute the facts and critics, just say the opposite and exaggerate to the max. It used to be called the ‘big lie’ when Nazi ideologue, Joseph Goebbels, used to employ it.

In the days immediately preceding his speech, Trump and administration officials began calling the coronavirus the ‘China virus’ or the ‘Wuhan virus’, in a clear Xenophobic attempt to divert blame. But even that was contradicted in his speech tonight. Now it was Europe that was the cause of the spread of contagion in the US. As he put it directly, it was Europe that had “seeded the virus” to the US as its citizens traveled from Europe to the US. So the Europeans were now to blame as well as the Chinese.

In the same breath identifying Europe as the cause, Trump announced he was “suspending all Europe travel to the US for 30 days”. However, he failed to clarify if that included cargo and freight from Europe to the US as well as passengers. If cargo were included, that of course would accelerate recession in the real economy, for Europe as well as the US as global trade between the two came to a halt. In an even more astounding clarification to all that, however, he added that the UK would be exempt from the freeze on all Europe to US travel.

That remark was almost comical. What then would stop European passengers from taking the ‘Chunnel’ (the train tunnel under the English channel) from France to London and then flying to the US after a London connection? Was he trying to help his buddy, Boris Johnson, and his fast weakening UK economy by diverting all Europe travel to the US through London? Was he making a concession to Boris on upcoming US-UK trade negotiations? To point was as silly as it was transparent.

After meeting with US bankers earlier in the day, Trump had made a point to mention that collapsing US stock prices was “not a financial crisis”. Oh yeah? Tell that to Fed chairman Powell who today rushed another $175 billion into the markets overnight. Or to the giant shadow banks, Blackstone and Carlyl Group, who today began telling their clients to quickly draw down their credit lines at their banks because it was likely the banks would freeze their access soon. Or tell it to the various financial analysts who are now increasingly warning of escalating defaults on the way in the junk bond market for oil-gas fracking companies. Oil at $20 a barrel. No crisis really? (Let’s not forget the oil price crash in early 2008 that preceded the collapse of Lehman Brothers and other banks in the fall of 2008).

What working class America got out of Trump’s speech was that something for them was ‘on the way’ but Trump couldn’t say what that was, except there would be “relief soon”. That’s all. A ‘maybe’. Sometime. Perhaps. We’ll see. Just wait.

But US business would not have to wait. What Trump did propose in his speech was a series of measures directed mostly at US small businesses. He said he would add $50 billion to the government’s small business loan fund to provide money capital to small businesses in need. Secondly, he promised deferring of tax payments due April 15. And there was the payroll tax cuts, where all businesses across the board would enjoy an immediate 6.2% tax cut—whether they were negatively affected by the virus or not.

The idea of suspending the payroll tax was first introduced by President Obama in the wake of the 2008-09 crisis, when his other economic stimulus programs weren’t working too well. In retrospect, today most economists agree that Obama’s payroll tax suspension had little to no effect on stimulating the real economy—and would have even less today. What a payroll tax cut did accomplish under Obama was to further undermine the finances of the social security trust fund. But that would serve to support Trump’s announced plans this past January 2020—while talking to billionaires in Davos, Switzerland, at the World Economic Forum—to cut social security and medicare after the November 2020 US elections. Create a deficit in social security in order to order cuts in its benefits.

But where was the assistance to those who needed it most? What about the millions of American workers who would now have to stay home because they were infected. Either voluntary quarantined or ordered to do so by their employers. Or the millions unable to ‘work from home’ due to their occupation. Or those too sick to go to work. What about the more than half of the 165 million US work force who, according to the Federal Reserve research, have less than $400 in emergency savings for such situations? Or the 30 million who have no health insurance whatsoever. Or the 87 million who may have some insurance but have $500, $1000 or even $2000 deductibles, plus copays? Or the millions who have no paid sick leave whatsoever, since the USA is the cheapest provider of paid sick leave among all the advanced economies. Even most union contracts provide only 6 days paid leave on average. That’s 8 less than a 14 day quarantine period. And what about the tens of millions of working class households with Kindergarten through grade 6 children who can’t afford nannys or babysitters? What if their parents have to stay home, not work and not get a paycheck because their school districts shut down? And what about the many millions who will almost certainly have to go on unemployment in the travel industry, hotel workers, restaurant workers, airline and ship workers, those who work in entertainment, sporting, and other ‘social gathering’ industries? Where were Trump’s proposals for them? Trump and his administration advisors keep referring to ‘targeted’ stimulus, but his ‘target’ is businesses whether they need it or not, while working families are not at all a ‘target’ and will have to wait to get “relief soon”.

Dr. Jack Rasmus
March 11, 2020

posted March 17, 2020
Covid-19 and the Working Class

US politicians and media are reporting approximately 500 cases of the virus in the US as of March 8. The actual number is almost certainly much higher, however. Perhaps as much as 10-fold that number, according to some sources. Why?

There’s the problem of reporting only tested cases so far, and there’s still a lack of available tests even to test and to verify all those infected without symptoms.. And even those showing symptoms may have been determined initially as not infected by the tests, since reportedly many of the early test kits were defective. Meanwhile, those without symptoms or pre-symptomatic are not being tested at all.

The Fiction of Voluntary Quarantine

Then there’s the policy of voluntary quarantining those who have come into contact with someone who was tested and found infected. It’s not working very well. Those who have come in contact with carriers of the virus are asked simply to stay home. But do they? There’s no way to know, or even enforce that. The case example why voluntary quarantining doesn’t work well is Italy.

Most of the northern Lombardy region, including the financial center of Milan in that country, is in ‘lock down’ right now. But all that means is voluntary quarantining. People are asked not to leave their town, or the larger region. But is that stopping them traveling around their town in public places? Or within the larger region? And spreading the virus there? Apparently not. Reportedly, infection for those tested have risen in just two weeks to more than 6,000 in Northern Italy. CNBC reports that, in just one day this weekend, that number increased by 1200! So much for voluntary quarantines. There’s no way, no sufficient personnel, not even accepted procedures, with which to daily check on those (in Italy that means hundreds of thousands) in voluntary quarantine.

The Real Costs to Workers

Average working class folks cannot afford to voluntary quarantine themselves. Or to stay home from work for any reason. Even if they have symptoms. They will continue going to work. They have to, in order to economically survive.

Consider the typical scenario in the US: there are literally tens of millions of workers who have no more than $400 for an emergency. As many perhaps as half of the work force of 165 million. They live paycheck to paycheck. They can’t afford to miss any days of work.

Millions of them have no paid sick leave. The US is the worst of all advanced economies in terms of providing paid sick leave. Even union workers with some paid sick leave in their contracts have, at best, only six days on average. If they stay home sick, they’ll be asked by their employer the reason for doing so in order to collect that paid sick leave. And even when they don’t have sick leave. Paid leave or not, many will be required to provide a doctor’s slip indicating the nature of the illness. But doctors are refusing to hold office visits for patients who may have the virus. They can’t do anything about it, so they don’t want them to come in and possibly contaminate others or themselves. So a worker sick has to go to the hospital emergency room.

That raises another problem. A trip to the emergency room costs on average at least a $1,000. More if special tests are done. If the worker has no health insurance (30 million still don’t), that’s an out of pocket cost he/she can’t afford. They know it. So they don’t go to the hospital emergency room, and they can’t get an appointment at the doctor’s office. Result: they don’t get tested, refuse to go get tested, and they continue to go to work. The virus spreads.

Even if they have health insurance coverage, the deductible today is usually $500 to $2000. Most don’t have that kind of savings to spend either. Not to mention copays. So even those insured take a pass on going to the hospital to get tested, even if they have symptoms.

The media doesn’t help here either. Reports are typically that those who are young, middle age, and in reasonable good health and without other complicating conditions don’t die. It’s the older folks, retirees with Medicare, or with serious other conditions, that typically die from the virus. Workers hear this and that supports their decision not to go to the hospital or get tested as well.

Then there’s the further complication concerning employment if they do go to the hospital. The hospital will (soon) test them. If found infected, they will send them home…for voluntary quarantine for 14 days! Now the financial crises really begins. The hospital will inform their employer. Staying at home for 14 days will result in financial disaster, since the employer has no obligation to continue to pay them their wages while not at work, unless they have some minimal paid sick leave which, as noted, the vast majority don’t have. Nor does the employer have any obligation legally to even keep them employed for 14 days (or even less) if the employer determines they are not likely to return to work after 14 days (or even less). They therefore get fired if they go to the hospital after it reports to the employer they have the virus. Just another good reason not to go to the hospital.

In other words, here’s all kind of major economic disincentives to keep an illness confidential, to go to work, not go to the hospital (and can’t go to the doctor). That risks passing on the highly contagion bug to others–which has been happening and will continue to happen.
Here’s another financial hit for the working class: child care. Schools are beginning to shut down. Even where no cases are yet confirmed. Stanford University just decided to discontinue all in class sessions and revert to all online education. But what about K-6 and pre-school? Or even Jr. high schools? When they shut down, kids must stay at home. But most working class parents can’t afford nannys or baby-sitters. Not everyone works in an occupation or company where they can ‘work from home’. Do they send the young kids to grandma’s and grandpa’s, who are more susceptible to the virus? With their kids required to stay home, they must miss work, and risk even losing their jobs. We’re talking about millions of families with 6 to 12 year olds. And who knows how long the schools will remain shut down.

In short, wages lost due to self-quarantining, forced voluntary quarantining after hospital testing, the cost of hospital emergency room visits (whether insured or not), the unknown cost of the tests themselves (the government says it will reimburse them but they don’t have the $1,000 or more cash out of pocket in the first place), the cost of paying for nannys or baby-sitters for young school age children when schools shut down–i.e. all result in a massive out of pocket expense for most workers that they don’t have.

Workers figure all these possibilities of financial disaster pretty quick and know that the virus will mean a big financial hit if they miss a day’s work, or even if they don’t. So they keep working, hoping they’ll recover on their own, refusing to get tested because of the potential loss of work, wages, and income, and crossing their fingers that their kids’ school districts don’t shut down.

Economic Contagion Channels: Supply Chains, Demand, Asset Deflation, Defaults & Credit Crunch

What this all means for the US economy is obvious. Household consumption was already weakening at the end of last year. Most of consumption was driven by accelerating stock valuations, which affect those in the top 10% who own stocks; or by taking on more credit–credit cards, which affects the middle class and below.

Over $1 trillion in credit card debt is what has been largely driving middle income and below consumption. Mainstream economists argue that defaults on credit card debt are only 3% or so, and thus not a problem. But that’s a gross average across all 130 million households. When this data are broken down, middle income and below family credit card debt is around 9%, a very high number more like 2007 when the last economic recession began.

Then there’s auto debt. As of 2018, reportedly 7 million turned in their keys on their auto loans. As in the case of credit cards, auto debt defaults will rise as well in 2020. Then there’s student debt, over $1.6 Trillion now. Defaults there are much higher than reported as well, since actual defaults (defined as failure to pay either principal or interest) have been redefined to something else other than actual default.

Add to all this the likelihood is very high that job layoffs will now begin by April, as the global supply chain crisis due to virus-related cuts in production and trade. More job loss means less wage income and thus less household spending and more inability to deal with the costs of the virus for most working class families.

Let’s not also forget the price gouging for certain products that is beginning now to appear, both online and in stores. That reduces working class real incomes and thus consumption too. Meanwhile, certain industries are already taking a big hit and layoffs are looming in travel companies of all kinds (airlines, cruise ships, hotels, entertainment). In places where the virus effect is already large, a big decline in restaurant, sports and concerts, movies, etc. has also begun.

The two big economic contagion channels impacting employment thus far are supply chain production and distribution reductions, and local demand for certain services (travel, retail, hospitality, etc.).

But a third major channel has just begun to emerge: that’s financial asset deflation in stocks, oil & commodity futures, junk bonds & leveraged loans, and currency devaluations.

Stocks’ price collapse leads to business shelving investment and even cutting back production. That means more job loss, reduced wage incomes, less spending, and economic slowdown.

Oil and commodity prices now collapsing also lead to energy industry layoffs. More importantly, in turn that will lead to energy junk bond market collapse–potentially spreading to all junk bonds, leveraged loans, and even BBB grade corporate bonds (which are really redefined junk bonds not investment grade bonds).

In other words, the collapse of supply chains, production-distribution, and industry by industry demand in the US may become even worse should the financial markets price collapse can lead to a general credit crunch. And that translates into a general economic real contraction. That’s precisely what happened in 2008, in a similar chain reaction from financial crisis to real economic crisis.
Workers are aware of all this possibly leading to longer run economic stress. In the short run, they consider possible wages loss if they reveal or report they have the virus, or get tested: i.e. lost wage incomes: the cost of immediate medical care; the cost of child care, etc. Better to tough it through and continue to go to work is a typical, and rational, response.

This is already going on. Hundreds of thousands with, and without, symptoms are not being tested; nor will most of them volunteer to be. Except for those on cruise ships who are forced to be tested (and they’re mostly retirees and elderly), few workers can afford to allow themselves to be. The infection rate is thus already much higher and will continue to rise. Voluntary quarantining doesn’t work much (again just look at Italy, or even Germany, where in one week cases (tested) rose from 66 to more than 1000). So out of economic necessity and to avoid personal economic devastation, they continue to work. But that doesn’t have to be.

US Policy Response: No Help for Working Class

US policy has been, is, and will continue to be a disaster. Trump’s cuts to health and human services in the past seriously hampered the US initial response. Tests had to be sent to Atlanta and the CDC for processing. Early test kits often failed. Only now are they getting to the states–to late to have a positive initial effect on the spread. Those suspected of exposure to others confirmed infected were simply sent home for ‘voluntary quarantine’. Initial legislation of $8.3 billion just passed by Congress provides for ‘reimbursement’ for voluntary testing, with no clarification if that covers the $1,000 hospital visit as well or just the cost of the actual test!

There could be, however, a government response that financially supports workers and allows them to be properly tested and treated.
An Alternative Policy Response

Why doesn’t the government simply say ‘go get tested for free’ and the hospital will bill the government for the costs? Not the worker pay up front with money he/she likely doesn’t have. Why isn’t there emergency legislation by Congress or the states to require employers to provide at least 14 days of paid sick leave, like other countries? And law guaranteeing employers can’t fire a worker sick with the virus for any reason? Or tax credits to working class families for the full cost of child care–paid to a nanny or to the worker–if they have to stay home in the event of a school district shutdown?

While business-investor tax cuts will almost certainly be the official government response, few of the above measures for working class Americans are likely. In America working class folks always get the short end of the economic stick. Congress and presidents pass trillions of dollars in tax cut legislation ($15 trillion since 2001 to investors, businesses and the 1%), but have raised taxes on the working class. Companies with billions of dollars in annual profits pay nothing in taxes–and actually get a subsidy check from the government to boot. Just ask Amazon, IBM, many big banks, pharmaceutical companies and more!

It can be expected the virus will have a large negative impact the standard of living and wages of millions of working class families. They will have to bear the burden of the cost with little help from their government. Meanwhile, businesses and investors will get bailed out, ‘made whole’, once again. In the process Consumption spending–the only area holding up the economy in 2019–will take a big hit. That means recession starting next quarter is more than a 50-50 likelihood.

In fact, the investment bank, Goldman Sachs, has just forecast that the effect on the US economy in the coming second quarter of this year will be a collapse of GDP to 0% growth.

Jack Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism;US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

posted March 13, 2020
Global Financial Asset Deflation Underway: Prelude to Next ‘Great Recession’?

This morning, Monday, March 9, financial asset markets continue to implode: US stocks are further collapsing -6% (Dow down 1650, Nasdaq >500 mid-day). Ditto Asian and Europe stock markets -6%. They were already declining sharply last week due to coronavirus induced supply chain shocks (reducing production) and expanding demand shocks (consumer spending contraction in select industries like travel, hotels, entertainment)–all of which are being forecast by investors to whack corporate earnings in 2Q20 big time. But imposed on the equities market crash of the past 2 weeks now is the acceleration of the global oil price deflation that erupted yesterday as the Saudis deal with Russia last year to cut production and prop up prices fell apart. Collapsing oil & commodities futures prices are now feeding back up equities and other financial asset prices. Financial price deflation is spreading, including to currency exchange rates. Money capital is fleeing everywhere into ‘safe havens’ (gold, Treasuries, Yen). Historic decline of US Treasuries that are now below 1% (30 yr.) and .5% (10 yr).

Will the financial asset markets deflation soon spill over to the credit system (especially corporate bonds) and accelerate the decline of real economies worldwide in turn? Are traditional monetary & fiscal policy tools now less effective compared to 2008-09? If so, why? Is the global economy on the precipice of another ‘great recession’?

Financial Asset Markets Imploding

So we have oil futures market prices–i.e. another financial asset market–collapsing now and impacting the stock markets. In other words, a feedback contagion underway on stocks market prices in turn. Feedback is occurring as well on other industrial commodity futures prices that are following oil futures prices downward in tandem. But that’s not all the financial contagion and deflation underway.

The freefall in financial assets (stocks, oil, commodities) is also translating into currency exchange price deflation in turn, especially in emerging market economies in Latin America, Africa, Asia highly dependent on commodity sales with which to earn needed foreign exchange with which to finance their past debt (e.g. case of Argentina whose negotiations with IMF on how to restructure their debt will now break down, I predict).

Currency exchange rates are in sharp decline everywhere as a result. For emerging market economies that means money capital is more rapidly flowing out of their economy, toward safe havens globally like the US dollar, US Treasury bonds, gold, and the Japanese Yen currency.

In short, stocks, oil-commodity futures, and forex currency markets are all imploding and increasingly feeding back on each other in a general deflating downward spiral. This is a classic ‘cross-contagion effect’ that occurs in financial asset market crashes. And crashing financial markets eventually have the effect of contracting the real economy in turn, by freezing up what’s called the credit markets. Businesses can’t roll over their loans and refi their corporate bonds. Banks stop lending. The rest of the real economy then contracts sharply. It starts in the financial markets, spreads to credit markets (corporate junk bonds, BBB corporate bonds, then top grade bonds).

Coronavirus Effect as Precipitating Cause

But it even earlier begins in a slowing real US and global economy that precedes the markets crash. The global economy was already weakening seriously in 2019. The US economy at year end 2019 was also weak, held up only by household consumption. Business investment had already contracted nine months in a row in 2019 and inventories built up too much. And, of course, the Trump trade war took its toll throughout 2018-19.

Then came the Coronavirus which shut down supply chains in China, and then in So. Korea and Japan in turn. That then began impacting Europe, already weakened by the trade war (especially Germany) and Brexit concerns. The supply chain economic impact of the virus developed into a consumer demand economic impact as well, as travel spending was reduced (airlines, cruise ships, hotels, resorts, etc.) and now, in latest development, other areas of consumer spending too. Both supply chain (production cutbacks) and demand (consumption cutbacks) are interpreted by investors as leading soon to a big fall in corporate earnings–which translates in turn into stock price collapse we see now underway. Investors have decided the 11 year growth cycle is over. They’re cashing in and taking their money and running to the sidelines, moving it from stocks to cash or Treasuries or gold or other near liquid financial assets.

So the Coronavirus event is really a ‘precipitating cause’ of the current markets crash. The real economy weakness was already there. The virus just accelerated and exacerbated the process big time. (see my 2010 book, ‘Epic Recession:Prelude to Global Depression’ for explanation how financial causation comes in different forms as precipitating causes, enabling causes, and fundamental causes. Book reviews are on my website). Again, worth repeating: global and US economies were weakening noticeably in late 2019. The virus further impacted supply chains (production) and demand (consumption), reduced corporate earnings in the near term and thereby simply pushed stock markets over the cliff.

Mutual Feedback Effects: Real & Financial Economies

But financial crashes have the effect of feeding back into the real economy as well, causing it to contract further in turn. What starts as a weakening of the real economy that translates into financial markets crashing, in turn feeds back into a further weakening of the real economy. Mainstream economists don’t understand this ‘mutual feedback effect’; don’t understand the various causal relationships between financial asset cycles and real investment cycles. (For my explanation of this relationship there’s my 2016 book, ‘Systemic Fragility in the Global Economy’ and specifically chapters on the need to distinguish between financial asset investing and real investing and how late capitalism’s financial structure has changed such that the inter-causal effects of financial-real investment have deepened and intensified.) Financial crashes accelerate and deepen the contraction of the real economy. Recessions turn into ‘Great Recessions’ as in 2008-09. They may even turn into bona fide ‘Depressions’ as in the 1930s should the banking system not get bailed out quickly.

Corporate Bonds & Credit Markets Next?

The feedback effect of the current financial asset price deflation–now underway in stocks, commodity futures, forex, (and derivatives)–on the real economy will soon emerge as the financial markets deflation affects the various credit markets. The key credit market is the corporate bond market. Bond markets are far more important to capitalism than equity-stock markets. The credit markets to watch now are the corporate junk bonds (sometimes called high yield corporates). Junk bonds are debt issued to companies that have been performing poorly for years. They are kept alive by banks helping them issue their bonds at high interest rates. Investors demand a high rate because the companies may not survive. In good times they do. But when markets and economies turn down, companies over loaded with junk financing typically default–i.e. can’t pay the interest or principal on their bonds. They go under. The investors that bought their risky bonds are then left holding their debt that becomes near worthless. The US junk bond market today is ‘worth’ more than $2 trillion. At least a third of that is oil & energy (fracking) companies. A large part of their bonds must be rolled over, refinanced, in 2021. But many of them will not be able to refinance. Why? Because global oil prices have just collapsed to $30 a barrel, perhaps falling further to $20 a barrel. At that price, the oil-energy junk bond laden companies will not be able to refinance. They will default.

That will spread fear and contagion to other sectors of the $2 trillion junk bond sector–especially big box and other retail companies (e.g. JC Penneys, etc.) that also loaded up on junk financing in recent years. Investors will disgorge themselves of junk bonds in general.
The fear of a crash in junk bonds will almost certainly spread to other corporate bonds, first to what’s called BBB grade corporates. That’s another $3 trillion market. But most of BBBs are really also junk that’s been improperly reclassified as BBB, the lowest (unsafe) level of corporate Investment grade bonds (the safest). So at least $5 trillion in corporate credit is at risk for potential default. If even a part defaults, it will send shock waves throughout the corporate economy that will have very serious implications–for both the financial and real economies, US and global, which are increasingly fragile.

Is Another ‘Great Recession’ on the Horizon?

For example, Japan is already in recession as of late last year. Now it’s contracting, reportedly, by 7% more. Europe was stagnant at best, with Italy and Germany slipping into recession before the virus hit. So. Korea and Australia are in recession now, as other economies in Asia and Latin America are now contracting as well. China economy reportedly will come to a halt in terms of GDP this quarter, or even contract, according to some sources. Meanwhile, Goldman Sachs forecasts the US economy growth will stall to 0% in the second quarter 2020.

So a collapse in risky corporate bonds will occur overlaid on this already weak real economic scenario. Should that happen, then the recession could easily morph into another ‘great recession’ as in 2008-09; maybe even worse if the banking system freezes up and central banks cannot bail them out quickly enough. Or if banks in a major economy elsewhere experience a crash–as in India or even Europe or Japan where more than $10 trillion in non-performing bank loans exist–and the contagion spreads rapidly to banking systems elsewhere

Failed Monetary & Fiscal Policies, 2009-2019

Which leads to the question can central banks now do so? After the 2008-09 crash, the Fed bailed out the US banks by 2010. But it kept interest rates near zero under Obama for six more years. Banks could still get free money from the Fed at 0.15% interest. (The Fed then paid them 0.25% if they left the money with the Fed). The Fed bailed out other financial companies to the tune of $5 trillion more as it bought up bad loans and Treasuries from investors at above then market rates. That is, it subsidized them. And did so for six more years. All this free money flowed, mostly into financial markets in the US and worldwide, creating the stock bubbles that are now imploding. So the Fed and other central banks went on a binge subsidizing banks for years, and in the process broke their own interest rate tool needed for instances like the present crisis. The Fed tried desperately to raise interest rates in 2017-18 so it could have a cushion for times like this. But it then capitulated to Trump and began reducing interest rates again in 2019–as it had under Obama for six years.

The free money from the Fed artificially boosted stock prices. On top of this Trump added a further subsidization of banks and non-bank corporations, businesses, and investors with his $4.5 trillion 10 year tax cuts passed January 2018. Most of that went as a windfall to corporate-business bottom lines. 23% of the 27% rise in corporate profits in 2018 is attributable to the windfall tax cuts. And where did that go? It too was redirected to stock and other financial markets, further inflating the bubbles. Here’s the channel and proof: Fortune 500 corporations in the US alone spent $1.2 trillion in both 2018 and 2019 in stock buybacks and dividend payouts to their shareholders. The stock buybacks inflated the stock markets, and most of the dividend payouts did as well. (Buybacks+dividends under Obama were nearly as generous, averaging more than $800 billion a year for six years).

In other words, the 25% run up in US stock markets in 2017-19 under Trump was totally artificial, driven by the tax cuts and by the Fed capitulating to Trump and lowering rates again in 2019. Very little of the annual $1.2 trillion went into the real US economy. For the past year real investment in structures, plant, equipment, etc. actually contracted for nine months in 2019, and is now contracting even faster in 2020.

Just as the Fed has busted its own interest rate monetary tool as it continually subsidized banks and businesses with low interest rates for years, the chronic corporate-investor tax cutting has busted fiscal policy responses to recession as well. Since 2001 the US has provided $15 trillion in tax cuts, the vast majority of which have gone to corporations, banks, and wealthy investors. That has led to government deficits averaging more than $1 trillion a year since 2008. And accelerated the US federal debt to more than $22 trillion. Fiscal policy is now seriously constrained by the deficits and debt–just as monetary policy as interest rates is now constrained by virtually all Treasury bond rates below 1% in the US and negative rates in Europe and Japan.

Interest rate policy responses to today’s emerging crisis is thus dead in the water. (As this writer predicted it would become in 2016 in the book, ‘Central Bankers at the End of Their Rope: Monetary Policy and the Coming Depression’). After years of monetary policy used as a tool to subsidize banks, it is now ineffective as a tool to stabilize the economy. Ditto for fiscal policy as tax policy. Used by Obama and even more so by Trump to subsidize corporations, stock buybacks, and financial markets, it is confronted by massive annual US budget deficits and accelerating national debt.

The likely responses by politicians and policy makers to the current emerging financial crisis and recessions in the real economy will be to cut taxes even further for businesses. It will have little effect, however. But will exacerbate levels of deficit and debt. That means the follow up will be to attack and reduce government spending, especially targeting social security, medicare, healthcare and education in 2021. Trump has already publicly indicated his intent to do so. On the Fed side, expect more injection of money directly into the economy and failing businesses by means of another major round of ‘quantitative easing’ (QE). That’s coming soon. Ditto for Europe and Japan where negative rates already exist. Watch China too should its economy contract for the first time in 30 years. And watch India, where it’s banking system is already fracturing due to causes totally separate from the virus effect. A banking crash in India is on the agenda. It could result in yet another financial blow to the global economy, adding to the current Saudi-produced oil price shock and the virus effect on supply chains and demand.

Summary and Conclusions

In summary, the global capitalist economy is unraveling financially, and soon further in real terms. Massive job layoffs in coming months in the US are a growing possibility. That will drive the US economy deep in contraction as household consumption, the only area holding up the US economy in 2019, now joins the contraction. It remains to be seen how US monetary and fiscal policy can restore economic stability given its self-destruction by US politicians since 2008. Trump policies have been no different than Obama’s-just more generous to corporate America and investors. Trump’s policies are best described as ‘Neoliberalism 2.0’ or ‘Neoliberal on steroids’. (see my just published 2020 book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’).

The US and global economies are well on their way to a repeat of the ‘great recession’ (or worse) of 2008-09. Only this time traditional monetary-fiscal policy is much less effective. More radical policy responses will likely be developed to try to stabilize the capitalist economies both in USA and elsewhere (where problems are even more severe). Watch closely as the crisis on the financial side moves on from equity (stock), commodities, and forex financial markets into derivatives markets and credit markets–especially junk bond and other corporate bond markets. Watch as the Fed tries desperately to provide liquidity to business and markets via its Repo channel and QE since its traditional rate channels are now ineffective. And watch as US and global capitalist advanced economies try to coordinate new fiscal policy responses to the general dual crisis in financial and real economic sectors of global capital.

Dr. Jack Rasmus
March 9, 2020

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. His website is http://kyklosproductions.com. He blogs at jackrasmus.com and tweets @drjackrasmus. Dr. Rasmus hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network, fridays, at 2pm eastern.

posted February 24, 2020
Coronavirus Global Economic Contagion Channels: From China to ROW


posted February 15, 2020
2 on US Neoliberalism in Crisis

PART 1: THE SCOURGE OF NEOLIBERALISM: IDEAS & IDEOLOGY vs. HISTORICAL PRACTICE
by Dr. Jack Rasmus, Z Magazine, December 2019
copyright 2019

“Hundreds of books and articles, perhaps thousands, have been written to date on the meaning and consequences of what’s called Neoliberalism. But clarity as to what it means, what has driven its evolution for the past four decades, and what’s its likely future trajectory remain insufficient at best.

Critics of Neoliberalism have yet to explain it fully or adequately. They are therefore unable to say little about its future evolution.
Some key questions that remain unanswered are: Has Neoliberalism been unraveling since the 2008-09 recent economic crisis and the slow growth, often stagnant recovery that followed? Is it being restored under Trump? Will it survive the next capitalist crisis almost certain to occur by the early 2020s? What are the material forces maturing within 21st century capitalist economy that will precipitate and drive that next crisis, and will Neoliberalism be able to successfully adapt? If not, what ideas and policies might replace the current Neoliberal era (1979-2019) of capitalism?

Most analyses concur that Neoliberalism represents an economic shift introduced by capitalists and their political elites—initially in the US and UK—in response to the crisis capitalism encountered in the 1970s decade. In other words, it has something to do with capitalist economy in crisis.

Other accounts attempt to explain its origins and evolution primarily from the perspective of an Idea that inspired, defined, and enabled US and UK capitalist-elites’ to respond successfully to the 1970s crisis.

Still others explain Neoliberalism as an historical practice, i.e. as a new regime of policies introduced in the late 1970s in the US and UK—later adopted by other capitalist economies worldwide to varying degree and form—that emphasizes austerity in government spending and reliance in policy matters on free markets.

But all that doesn’t really tell us much. Defined that way leaves its meaning still opaque and ambiguous—and therefore unable to predict where and how Neoliberalism may evolve in the future.

The analysis of Neoliberalism to date has produced so many interpretations, often contradictory, that readers remain confused as to what exactly it means. Is it about introducing free market principles into economic and social policy? Is it about austerity in fiscal spending? Is it just a substitute term for what was formerly referred to as Imperialism abroad and class exploitation at home? As one analysis concluded, “imprecision would seem to characterize its use, sometimes even among those for whom the concept is central to their analysis, and its over-use is seen to have resulted in a loss of analytical value.”


The Ideology of Neoliberalism

According to those approaching Neoliberalism from the perspective of the evolution of an Idea, the Neoliberal Idea originates around mid-10th century among ultra conservative intellectuals like Friedrich Hayek and Milton Friedman in economics; in the philosophy of radical individualism by Karl Popper and Robert Nozick; and in policy proposals from right wing pundits like Charles Krauthammer, William Kristol and Robert Kagan—to name but a few or the more notable.

As these intellectual originators viewed it, their task was to adapt, repackage and resell some of the main tenets of classical liberalism. To plant and nurture the seeds of new ideas, and counterpose those ideas to the prevailing dominant Keynesian economic and otherwise social compact views that prevailed post world war II. The new ideas would be resurrected, classic Liberal ideas adapted to the post-war environment. New ideas that were new-Liberal or Neoliberal, designed to displace the dominant Keynesian-social compact-collectivist ideas of the period and encourage and usher in a new set of policies based on the new ideas that would, in effect, represent pre-Keynesian, pre-social compact ideas once again. It was to be old classic Liberal wine in the new Neoliberal bottle.

But is Neoliberalism actually ‘Liberal’? How does it compare with the classic liberal economic and social theory of the 17th-18th century? Neoliberalism as an Idea claims it is based on classic liberal ideas of free markets and individual freedom. It claims that by adapting classic liberal principles and propositions to new economic and social policies the new policies will succeed in promoting economic growth and stability, whereas the old Keynesian-collectivist policies failed to do so. Thus it is Neoliberal Ideas that drive the eventual policies that came to be known as ‘Reaganomics’ in the US and ‘Thatcherism’ in the UK.

But Neoliberal Ideas have actually little in common with the classical Liberal; and it is an intellectual conceit to argue that Neoliberal Ideas drove and determined the Neoliberal policies that were eventually introduced in the late 1970s-early 1980s. In fact, a reasonable argument may be made to the contrary: it is Neoliberalism in Practice that reached back and adopted Neoliberal Idea propositions in order to justify and legitimize its policies. But what exactly are the basic propositions of Neoliberalism as Idea? What congruence is there between those propositions and the 17th-18th century Classic Liberalism? And do either—i.e. Classic Liberal and Neoliberal Ideas—have anything to do with Neoliberalism in Practice?


The Basic Propositions of Neoliberalism as Idea
:

• Markets should always be free of government interference and the economy and policies should be based on free markets

• Free markets require deregulation of business, as well as privatization of all public ownership of production of goods or services

• Free markets are always and everywhere more ‘efficient’ than regulated markets or government provided goods and services

• Free trade should always and everywhere govern the exchange of goods and services between economies and countries

• Government should never intervene in markets—whether to provide public works, correct negative ‘externalities’ created by those markets, or even to provide public education, health care, or other services

• Taxes should be cut to stimulate economic growth—especially taxes on business and investors. Cutting taxes creates additional investment and therefore employment and growth

• Government budgets should always be ‘balanced’, avoiding deficits and therefore accumulation of government debt

• To ensure stable economic growth, the money supply should be increased according to a ‘monetary growth rule’—i.e. a set amount every year.

But these elements of the Neoliberal Idea have very little to do with Classic Liberalism. And have even less to do with Neoliberalism in actual practice.

The Basic Ideas of Classic Liberalism:

• Markets should be free only to the extent that they fostered superior moral behavior and enable the development of the individual.

• Free markets were more efficient only if they promoted competition among capitalists, resulting in goods being produced at the lowest cost, and therefore lowest price, while providing the greatest possible amount of goods to the greatest number of individuals.

• Not all business activity should be deregulated or privatized. Some things markets would not produce, even if socially necessary and demanded by the public; or they would produce them for only a wealthy minority who might afford them only at the much high prices that markets might have to charge a smaller, privileged number of buyers.

• Markets sometime behave badly and at times must be regulated. Not all government services should be privatized. In fact, services like public education must be provided by government since markets would not find it profitable to provide them.

• Free trade is not always appropriate everywhere. Nor beneficial to all.

• Economic growth is stimulated by raising taxes on business, not cutting taxes. Higher taxes force business to introduce more efficient ways of producing to offset the cost of the tax increase. New technology that results actually increase jobs and stimulate economic growth.

• Budget deficits are justified for purposes of spending on defense, public safety, and critical social services (education) and public works that markets may not provide

• Money is ‘neutral’. An increase in its supply cannot, by itself, lead to economic growth and stability. Growth is generated only by increasing available land, labor, and capital and by raising its productiveness.

A close reading of the actual works of 17th-18th century Classic Liberal economists like Adam Smith, David Hume, and others shows the preceding points represent fundamental ideas of Classic Liberalism. But, as a comparative reading clearly shows, they are in sharp contrast to the basic propositions that define Neoliberalism as of the late 1970s. In short, in so far as classic liberalism is concerned, Neoliberalism is not ‘Liberal’ at all. Neoliberalism is not ‘new’ Liberalism or any kind of Liberalism. What it represents is something quite the contrary.

Comparing Neoliberalism as Idea with Neoliberalism in Practice

But what about Neoliberalism in actual, historic practice? How does it compare—to Classic Liberalism as well as Neoliberalism as Idea? Neoliberalism in Practice differs from both. It is even further removed from Classic Liberalism. And in a number of ways it is even the opposite of Neoliberalism as Idea.

1. First, Neoliberalism in practice is not at all about expanding free markets. There are few, if any, free markets under Neoliberal capitalism. The fiction is created by Neoliberalism as Idea writers is that, just because industry is deregulated and public goods privatized, deregulation is equivalent to the creation of ‘free markets’. Neoliberal capitalism is about the destruction of market competition and the concentration of economic power among fewer and fewer remaining businesses in an industry. It is about eliminating ‘free markets’ whenever and wherever possible. Capitalism always drives toward eliminating competition, and without competition there are no ‘free’ markets in the Liberal sense. So Neoliberalism in Practice is the antithesis of free markets.

It is also different in that, in practice, Governments in the Neoliberal era of capitalism are deeply and increasingly involved in the economy on behalf of capitalist interests in general, and in particular involved in assisting mergers and acquisitions and thus in advancing the concentration of capital and business into fewer producers and sellers. And the larger and fewer the remaining producers, the less ‘efficient’ they become. That is, the higher costs of their production and in turn the higher the prices they charge consumers. Markets in effect become more concentration, less efficient, and less ‘free’ as a consequence of Neoliberalism in Practice.

2. One might add to Neoliberalism’s contribution to ‘micro’ level inefficiency the even more massive macro inefficiency of capitalist Neoliberalism. How efficient is Neoliberal capitalism when it creates economic crashes like 2008-09, when 14 million homeowners in the US alone were foreclosed and lost their homes? Or when 20 million were left unemployed, and then underemployed for years more after 2009. Or when $4T in lost interest income occurred for retirees as a result of the near zero interest rate policy of the central bank, the Federal Reserve, in effect from 2009 to 2016? Or the additional $4T in collapsed retirement benefit program values. Meanwhile the same central bank zero rates resulted, in contrast, to more than a $1T a year on average in stock buybacks and dividend payouts to shareholders every year from 2010 through 2019. Corporations borrowed virtually ‘free’ money at near zero interest rates—either from loans or by issuing corporate bonds—and turned around and distributed most of it to shareholders at the rate of $1T plus a year. Or what of the macro-inefficiency of spending $7 trillion in US war products that were either blown up or dumped in deserts when declared obsolete. The ‘macro-inefficiencies’ of Neoliberal capitalism are massive and almost incalculable in the US economy alone.

In short, there is nothing ‘free’ or ‘efficient’ about markets in the Neoliberal era in practice. The founding intellectuals of Neoliberalism as Idea, when promoting that notion, are therefore simply peddling a lie—i.e. they are promoting the ideology of Neoliberalism not its reality. They are peddling a notion of Neoliberalism that doesn’t exist in the real world of Neoliberal practice. What Neoliberalism in Practice has done is simply used the lie that free markets are more efficient in order to justify and to ‘sell’ the actual policies of industry deregulation and public goods privatizations. In other words, deregulation and privatization have nothing to do with free and efficient markets. The latter are just the intellectual veil, the cover to justify the Neoliberal policy.

3. Nor is the Neoliberal idea that tax cuts create jobs and economic growth any more the case in fact. Tax cutting under in the Neoliberal era since 2000 alone has amounted to more than $15 trillion—80% of which has accrued to investors, businesses, and the wealthiest households. In turn, that $15 trillion has resulted in the weakest rate of investment, job creation, wage increases, and general economic growth in the US in the past half century. In other words, business-investor tax cuts did not create jobs. They destroyed them, as tax incentives strongly encouraged US multinational corporations to move operations offshore. Trump’s 2018 tax cuts—the latest iteration of this ‘business tax cuts create jobs’ shell game alone provide another $2 trillion for US multinational corporations over the next decade. They can now produce offshore tax free. Why then should they expand production and jobs in the US, one might ask, when they can henceforth produce offshore and pay no taxes?

4. Neoliberalism as Idea further maintains that free trade should be the norm everywhere. But in Neoliberal Practice free trade means incentives to further move US production offshore. US businesses then produce offshore at lower cost and ship the goods produced back into the US, now without tariffs, for US workers to buy, now with lower paid service jobs replacing the higher paid manufacturing jobs that were offshored due to free trade. Instead of higher wages, workers are now allowed to borrow (credit) to buy the products, incurring debt, the interest of which they now pay banks and stores issuing the credit cards. Free trade also means banks and finance capitalists, who get to borrow at near zero interest rates, invest the money offshore instead of in the US. Free trade is more about such international money flows from the US as it is about goods and product flows produced abroad back to the US. All this is the reality of Neoliberal free trade, compared to the fiction of the Neoliberal Idea of free trade where all parties somehow benefit from free trade—workers, consumers, as well as capitalist producers and bankers.

5. Perhaps nowhere is the distinction between the Neoliberal Idea on deficits and debt greater from the practice of Neoliberalism. The former declares the objective is to balance the budget and reduce government debt; whereas Neoliberalism in Practice is about allowing the uncontrolled escalation of annual budget deficits and therefore government debt. At barely $1 trillion when Neoliberalism in Practice began in 1979-80, deficits and debt had escalated to $4T by 2000, rising to $10T by 2009, and to nearly $23T by year end 2019. Trump 2018 tax cuts and annual war spending escalation will raise debt to more than $35T by 2028.

6. The monetary growth rule of Neoliberalism as Idea also contrasts sharply with the practice of Neoliberalism. Instead of allowing the central bank to slowly and steadily increase the supply of money in the economy according to an objective rule, or fixed formula, the practice of Neoliberalism has been to have the central bank continually inject massive amounts of money into the economy. In times of banking crises and after as well. The result is chronic, low interest rates, which enable lending at low cost to investors and corporations alike, much of which borrowed is then diverted to offshore investments, to re-investment in stock, bond and other financial markets, to distribution to shareholders in the form of stock buybacks and dividend payments, or into merger and acquisition of competitors by businesses. The Idea of Neoliberalism thus has little in common with its practice so far as money is concerned.

What the foregoing paragraphs reveal is that Neoliberalism as Idea has little in common with Classical Liberalism, but even less in common with Neoliberalism as Practice. The function of Neoliberalism as Idea is therefore to provide logic and pro-individual, pro-personal freedom arguments in order to justify the Neoliberal policies that occur in practice—i.e. policies that are often quite contrary to those arguments and that Idea. The practice of Neoliberalism is thus neither classical liberal nor even Neoliberal.

Contrary to many accounts of Neoliberalism, the Idea of Neoliberalism does not give rise to, or enable Neoliberalism as actual historical practice. The role of Neoliberal Ideas is to legitimize—after the fact—the actual policies and practice of Neoliberalism.

A problem with many accounts and analyses of Neoliberalism is that they assume that Neoliberalism as an Idea is what gave rise from the mid-1970s on to Neoliberalism as an actual historical practice. Somehow the ideas are what convince capitalists, their lobbyists, their business organizations, their trade associations, etc. to propose to their political elites in Congress and legislatures the actual Neoliberal policies, The policies are thus a reflection of their ideas. However, as just shown, Neoliberal ideas have little in common with the actual policies and practices of Neoliberalism that get introduced and implemented. So how can the ideas drive the actual historical practice, i.e. the policies, if they are different?

Perhaps the causation is actually the reverse: the policies and practices are developed by the capitalists and their political elites. The ideas of Neoliberalism—a strange amalgam of classic and non-classic liberal propositions—are after the fact then employed as justifications and legitimization of those policies. Embalmed in a veneer of personal freedom, individualism, efficiency, benefits from employment, etc., the dead body of Liberalism is resurrected in decayed form to argue that the corpse is still alive and liberal even though it has long deceased.

Nonetheless, many critics of Neoliberalism simply slip back and forth between the Idea and the Practice of Neoliberalism, with little explanation of how the one, the Idea or the Practice, causally determines the other.


Neoliberalism in Practice

What then are the actual policies associated with actual, historical Neoliberalism? Here too critics of Neoliberalism fail to provide a comprehensive explanation. As noted previously, major attention is given to Neoliberalism as Austerity policy, or as industry deregulation and privatization, or as free trade. But little attention is paid to Neoliberal monetary policy or Neoliberal external policies apart from trade—i.e. currency exchange rate policy or what is called the ‘twin deficits’ policy solution. Nor is much explanation given to how Neoliberal policy promotes the financialization of the global economy, financial deregulation, and cross border money capital flows. While fiscal policy and industrial policy (i.e. deregulation, privatization, de-unionization, wage compression, etc.) are addressed in most accounts of Neoliberalism, not much in the way of analysis and critique is given to External Policy and Monetary Policy. But Neoliberalism in Practice, i.e. as policy, is more than just Fiscal Policy and Industrial Policy.

Neoliberalism in Practice represents a particular policy regime, consisting of Fiscal policy (tax, spending, deficit-debt management), Industrial policy (deregulation, privatization, de-unionization, wage compression, financialization), Monetary policy (excess liquidity injection, chronic low interest rates), and External Policy (trade, low US dollar exchange rate, twin deficits).

Neoliberalism represents a particular mix of these policies. Before Neoliberalism, the four main policy areas also existed but in a different mix and different relationship to each other. It was a different policy ‘regime’.

The policy regime before the Neoliberal policy shift originated in the wake of of the second world war, originating roughly in the period, 1944-53. A still different policy regime was created in the US just prior to world war one, in the period 1908-13. Thus the US experience has been to restructure the economy in a major way at least three times in the last century: 1908-13, 1944-53, and 1979-88. The latter, 3rd restructuring is simply called the Neoliberal. Its policy mix or regime differed from the two prior regimes.

The policy restructuring in all three cases was designed to change policies in order for US capitalism to confront a challenge or crisis. In 1908-13 US capitalism prepared to restructure its economy in anticipation of becoming a more or less equal competitor with the UK and European capital in general on the stage of the world economy after world war one. In 1944-53, capitalists restructured once again as the US became the sole hegemon in the global economy following world war two. Both restructurings represent US capital shifting policy fundamentally in order to confront a major crisis and opportunity. In each case the restructurings were accompanied by a particular policy reordering. That reordering occurred a third time as a response to the crisis of the 1970s, not war. In that sense it differed from the earlier two restructurings and policy shifts.

In the Neoliberal case, the US re-established itself as the hegemon in the global capitalist economy for at least several more decades. Challenges domestically and abroad in the 1970s were successfully contained, and US capital emerged once again globally and internally as the key dominant player in the global economy.

Neoliberalism in Practice—i.e. as a particular new policy mix of the four areas—continued to expand and evolve throughout the 1990s and after 2000. The global crash of 2008-09 halted its development and evolution, however. As argued in this writers’ book, ‘The Scourge of Neoliberalism’, Neoliberal policy evolution hit a wall with the 2008-09 crash. Obama tried but failed to restore it and regain its momentum. Trump’s policies should be viewed as a future attempt to restore Neoliberalism as policy, albeit in a new virulent and aggression form that is still in progress.

Whether Trump will succeed remains to be seen. However, there are fundamental real and material forces in development—involving changes in technology, AI & machine/deep learning, the nature of money, production processes and distribution channels, new business models, product-capital-labor markets, and in political resistance both domestic and foreign—that may well prevent Trump’s restoration attempt.

Over the past four decades Neoliberal policy has evolved and expanded. It has also begun to develop its own internal contradictions—as discussed in more detail in the aforementioned book. As a partial summary of Neoliberalism in Practice at this point, the following elements may be said to now constitute Neoliberalism in Practice as of 2019:

• Social program policy cuts, focused heavily on reducing and eliminating government programs introduced from 1934 through 1965;

• Aggressive deregulation of industries, especially banking & finance, communications, public and private transport, education and healthcare;

• Privatization of employer contributed healthcare and retirement services introduced with the 2nd restructuring, privatization of military services, and privatization of public goods and services including federal lands access;

• Deep reduction of business-investor-wealthy household taxation on profits and capital incomes (interest, dividends, business rent, etc.);

• Chronic escalation of war and defense spending amidst social spending austerity;

• Tolerance of rising budget deficits, the national debt, and interest on that debt;

• Central bank monetary policies based on chronic liquidity injections designed to ensure long term low bank interest rates that subsidize business costs of investment;

• Incremental de-unionization and weakening of collective bargaining, as well as compression of wage incomes;

• Promotion by government of radical changes in the labor markets, creating millions of contingent labor employment, low paid service jobs, atrophy of minimum wages, massive offshoring of manufacturing employment, and encouragement of on-shoring of skilled labor visa policies;

• Substituting free trade for traditional trade policy measures based on tariffs, quotas, and administrative measures as the primary means to maximize US corporate exports;

• Acceptance of US trade deficits in exchange for a ‘twin deficits’ solution ensuring US offshore dollar recycling arrangements with major allies and global trading partners;

• Encouraging a long term low US dollar exchange rate and US money capital outflows and foreign direct investment;

• Promotion of financialization of the US economy at the direct expense of real asset investment based economic growth;

Thus Neoliberalism in Practice is not simply a set of policies associated with social program cutbacks and fiscal austerity, or industry deregulation or privatization, as many identify. It is much broader than that. It represents a basic economic system restructuring that involves a resurgence and aggressive expansion at the expense of both foreign capitalist competitors as well as domestic working classes. It is an attempt to re-establish US economic hegemony in the late 20th century and well into the 21st. In that it succeeded…until the crash of 2008-09, from which it is yet to fully recover.

What’s Missing in Critiques of Neoliberalism

Apart from not adequately addressing the material origins of the restructuring that gives rise to Neoliberalism, critics of Neoliberal policy fail to address key elements of its unique policy and program mix. To begin with there’s the lack of analysis of what’s called external policy—i.e. twin deficits, external debt, currency exchange rates, foreign direct investment and global money capital flows—are often largely missing. Neoliberalism is characterized by a particular set of external policies that differ from prior restructurings.

Consideration of trade or goods flows, and perhaps free trade treaties, are the limited focus of most critiques. Another area where critics fall short is a superficial treatment of Industrial policy. While de-unionization, job offshoring, general wage compression, and industry deregulation are addressed by critics, fundamental developments like the rise of contingent labor and the even more destructive now just emerging phenomenon—artificial intelligence and machine learning—are ignored for their effects on labor markets and the shift in capitalist vs. worker relative power they represent. Also missing, in all but minor terms, is the financialization of the global capitalist economy. Here the role of capital markets, shadow banks, derivatives, the rise of the new global finance capital elite, and the relative shift to financial asset investing, crowding out real investment, are left largely unconsidered; in other words, that which might be classified as the new phase of imperialism and US vs. global capitalist class competition and conflict is not adequately addressed. Not least, what is also missing in most accounts of Neoliberalism is how its advance is closely correlated with the atrophying and decline of Democracy in America—i.e. the norms, practices, parties, the electoral system, and even government institutions.

Dr. Jack Rasmus is author of the just released book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, October 2019, which is available for purchase at discount from the author’s blog, jackrasmus.com, and website, http://kyklosproductions.com. Jack hosts the weekly radio show, Alternative Visions, and tweets at @drjackrasmus.

PART 2: THE SCOURGE OF NEOLIBERALISM: TRUMP’s FAILING 2.0 RESTORATION,
by Dr. Jack Rasmus, Z Magazine, February 2020

The following is a continuation of the analysis of contemporary US Neoliberalism in practice that was begun in Part 1 in the preceding issue of Z Magazine. In Part 2 the arguments is made US Neoliberal policy experienced a crisis in 2008-09 US and the historic weak recovery that occurred thereafter under the Obama regime. The Trump administration should be understood as an effort to restore the Neoliberal offensive in a more virulent, aggressive, ‘2.0’ form.

Once again the four key areas that define Neoliberalism are considered: Fiscal policy, Monetary policy, Industrial policy, and Trade-External policy. And after three years of Trump it has become clear that Trump has restored momentum to Neoliberalism in the US, although only partially and in only select policy areas. The Trump restoration to date is thus incomplete.

In areas of Trade-External policy he has clearly failed to date, clearly succeeded in Fiscal-Tax policy, while in still others—such as Monetary policy—a restoration effort still ‘in progress’. Looking into the future, material forces that have been developing within US and global capitalism make it increasingly unlikely Trump will be able to success in fully restoring US Neoliberal policy momentum such as existed in the 1979-2007 period.

What will follow Trump’s failed restoration is yet to be determined. But whatever it is, it is unlikely to conform to the definition or character of Neoliberalism as it has been known up to now. What follows will either be something more radical and aggressive on behalf of capitalist America—at the expense of American capitalism’s domestic and global challengers—or else a return to a more progressive policy regime that will reverse the worst legacies of Neoliberalism.

(The following analysis of Trump Neoliberalism is an excerpt from the long chapter 8 in ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, by Dr. Jack Rasmus, published by Clarity Press, January 2020.)

Trump’s Reactionary Neoliberalism

Trump’s election and his economic policies that have followed is best understood as a reaction to the Neoliberal policy regime’s failure under Obama to successfully address the economic crisis of 2008-09, both domestically and globally. Furthermore, Trump’s attempt to resurrect Neoliberalism has more in common with the original neoliberal project initiated by Reagan: i.e. in both cases, their economic policies represent an attempt to confront a preceding period of extended stagnation of the US economy. With Reagan, the 1970s economic stagnation and crisis; with Trump, the weakest recovery from recession in the past fifty years that occurred 2008-2016. .
It remains to be seen, however, whether Trump can still succeed in resurrecting neoliberal policies by restoring to full effect the following twelve hallmark characteristics of neoliberal economic policy:

• significant expansion of US war-defense spending;

• subsidization of investors’ and businesses’ profits via business-investor tax cuts;

• shifting of total tax burdens to payroll taxes and other regressive taxes;

• reductions in social program and social benefits spending;

• restructuring of external trade and currency relationships with US global capitalist competitors, allies and adversaries alike;
• expansion of free trade treaties, whether multilateral or bilateral;

• long term low dollar exchange rate to maximize profits of US multinational corporations’ offshore operations and competitiveness of US corporate exporters;

• continuation of the ‘twin deficits’ solution to enable financing of ever larger US budget deficits and national debt;

• continuation of central bank policies ensuring chronic low interest rates via traditional bond buying operations, and/or Quantitative Easing (QE), to subsidize profits of the private banking system and financial markets;

• expansion of industry deregulations and privatizations of public goods, services and programs;

• destruction of unions and collective bargaining to compress nominal wage and negotiated fringe benefits;

• wage compression by means of delay of minimum and protective wage legislation inflation adjustments, by encouragement of growth of contingency labor employment, by offshoring of jobs, by encouraging displacement of labor with capital by automation, and by policies permitting importation of lower paid skilled labor by H1-B and L1-2 visas;

These are the major policy offensives that together have defined the US neoliberal policy regime since 1980. They are policies that in turn have facilitated the induced restructuring of US capitalist economic relations in the Neoliberal era— with both other capitalist economies as well as with US domestic non-capitalist groups and classes. Not least, they are also the policies that brought about the deleterious conditions faced by large masses of working people, which were responsible for Trump’s election victory.

Trump’s Neoliberalism: Successes, Failures, Work Still In Progress

After nearly three years of Trump policy initiatives it is evident that several of the key elements of neoliberal economic policy have been successfully resurrected and restored by Trump after the crisis of neoliberal policy experienced post-2008. These are:

• business-investor tax cutting,

• defense-war spending escalation,

• industry deregulation and privatizations, and

• labor compensation compression and union destruction.

The restoration of other neoliberal elements is a work still in progress:

• the restoration of chronic low interest rates (i.e. central bank monetary policy) and

• ensuring a low US dollar valuation (i.e. exchange rate policy).

But still other neoliberal policies thus far have been proving difficult for Trump to restore. These include, in particular:

• deep cuts to entitlement and other social program spending,

• the restructuring of US trade relationships, and

• ensuring the continuation of the ‘twin deficits’ solution required to continue to successfully finance US budget deficits and the US national debt.

Trump’s failure to restore neoliberal policy across all these fronts simultaneously is in part due to the fundamental contradictions between the four dimensions that constitute the Neoliberal policy mix and regime—i.e. fundamental contradictions lie at the heart of the neoliberal policy regime itself.

But Trump’s failure to date is not due only to these fundamental contradictions between Neoliberal policies. It is also due to the resistance, both domestic and foreign, that Trump’s attempted restoration has been generating, both home and abroad. Trump has launched a more aggressive, virulent form of neoliberalism in his effort to continue an ultimately untenable neoliberal policy regime for yet another decade. Hence, it’s a nastier, 2.0 version, introduced in the increasingly desperate effort to overcome the neoliberal contradictions and the resistance to it.

Trump Neoliberalism: Restructuring Economic & Social Relations

Trump’s more aggressive, nastier form of Neoliberalism requires not only launching new neoliberal initiatives—like global trade restructuring—but also requires fundamental structural change in US political-governmental institutions and US political culture.. Political change under Neoliberalism is thus necessary in order to achieve more aggressive economic policy objectives.

In other words, just as Neoliberal policy evolution drives economic restructuring, and economic restructuring requires ever more aggressive Neoliberal policy—so too does Neoliberal policy in turn drive political restructuring in order to address the resistance to its continuation as it becomes more virulent and aggressive.

Late stage neoliberal evolution thus requires a change in the relations within and between formal US government institutions (Congress, Executive, Judiciary), between the electorate and those institutions, within and between traditional political parties, and between new political rules and norms and traditional civil liberties and democratic practices protected by the Bill of Rights. Change in international political institutions is also driven by the effort to make way for, extend and expand Neoliberalism. Institutions like the IMF, World Bank, NATO, G7, G20, and national security arrangements among US and its allies, etc., become targets for restructuring by the US as the American empire reacts to its waning influence and power on the global stage.

Has Trump Restored Neoliberalism?

After nearly three years in office, Trump’s restoration of the Neoliberal policy regime is a mixed picture. On the one hand, Business-Investor tax cuts and War-Defense spending fiscal policies have clearly been set back on an accelerating growth course established under George W. Bush. In fact, they are being pursued even more aggressively. What we have here is clearly a more virulent Neoliberalism 2.0. The faltering of War-Defense spending under Obama—which was necessary to justify an even greater $1.-$1.5 trillion reduction in social program discretionary spending—has been especially restored. In addition, Trump’s tax cuts have exceeded in two years what Obama had achieved in eight. So its restoration—and then some—with regard to these two Neoliberal policies.

A similar case may be made for Trump’s Industrial Policy as it applies to deregulation and privatization. Other elements of Industrial Policy represent more of a continuation of preceding trends prior to Obama, and an elimination of Obama’s softer approach in some areas of wage, de-unionization, and other industrial policy programs. While Obama slowed and in some cases rolled back the privatization of public lands and public goods, Trump has succeeded in reversing those rollbacks. On the other hand, Obama was an advocate of privatizing education through Charter schools and his ‘No Child Left Behind’ program. Nor did he lift a finger to defend the attack on teachers unions and collective bargaining in the public sector. Industrial policy associated with wage compression and jobs under Trump represents a return, after Obama, to blocking federal and other legislated wage minimums, while reigniting the Neoliberal attack on reducing eligibility for overtime pay. But wage levels for most workers consistently fell under Obama, and under Trump have proved the same even as the high end of wage earners may have improved under Trump.

But there are three area of Neoliberal Policy where Trump restoration has clearly been failing to date. He has not been able to achieve even token reductions in social program spending and other non-defense discretionary spending. He has clearly been willing to forego those cutbacks in exchange for agreement by Democrats to allow his escalating War-Defense spending. Nor has he been willing to take on a fight to cut mandatory spending programs like social security retirement and Medicare as yet. Should he win another term in office, however, that attack is almost guaranteed as forthcoming after 2020.

His two highly successful restorations—i.e. War-Defense spending and Business-Investor ta cutting—combined with failure to cut social program-nondefense discretionary spending has resulted in a rapid rise of $1 trillion dollar annual budget deficits and accelerating US national debt. That too must be acknowledged as a failure at Neoliberal restoration.

The two areas of Neoliberal Policy where Trump’s restoration has failed most dramatically to date, however, are Monetary Policy and External Policy—the latter in particular with regard to trade relations restructuring and ensuring a low dollar exchange rate. Neoliberal Monetary Policy defined as ensuring chronic, long term low Federal Reserve interest rates might be called a fight over policy in process. Thus neither Monetary Policy nor External (especially trade) Policy to date represent a restoration of Neoliberalism by Trump by any definition.

The question is whether the contradictions inherent in these various elements of Neoliberal policy will, or even can be, overcome. As the beginning of this chapter indicated, Trump has clearly successfully restored some of the key elements of Neoliberal policy regime, has just as clearly failed to restore other elements, and other key elements remain a ‘work in progress’. Some long standing contradictions within Neoliberal Policy that have been there since the beginning under Reagan still remain—such as the difficulty achieving Neoliberal external/trade policy objectives without undermining Neoliberal fiscal and monetary policy elements; or new contradictions emerging and intensifying—such as the growing contradictions within fiscal policy between deficits & debt financing, on the one hand, and Neoliberal tax cutting and defense spending on the other. Or within Neoliberal monetary policy—in the form of central bank engineering lower interest rates while still selling Treasuries at an attractive rate yield in order to finance budget deficits. Contradictions within Neoliberal external/trade policy are also growing—such as keeping the dollar exchange rate low while simultaneously raising tariffs, even as the latter slows the global economy and raises demand (and therefore value) of the dollar.

Another long standing contradiction inherent in Neoliberalism since the beginning, under Reagan, has been the inability of U.S. capitalist economy to reconcile rising War-Defense spending with business-investor tax cutting while deepening Austerity in social program expenditures. Domestic resistance has prevented the latter, except for a brief period during the last crisis in 2011-13 under Obama. Neoliberalism’s ‘alternative solution’ to this was to establish the ‘twin deficits’ that would in effect provide the revenues (from borrowing) to cover the deficits created by Neoliberal continued War-Defense escalation and ever greater Business-Investor tax cutting. But this fiscal policy contradiction solution, by means of External policy (running trade deficits and introducing free trade agreements), has spawned a further and perhaps even more serious contradiction: namely, rising global capitalists’ opposition to Trump’s trade wars policy which itself threatens the twin deficits solution to the fiscal policy contradiction.

Thus domestic US popular opposition to austerity in social spending (which will certainly intensify should austerity apply to mandatory social programs like social security), on the one hand, and capitalist competitor opposition to Trump Neoliberal trade policy, on the other, together represent a political reflection of the contradictions that exist today within the Neoliberal policy regime and the opposition to which it gives rise. Neoliberalism cannot have it three ways: it can’t have social program austerity amidst escalating War-Defense spending and Business tax cutting. It can’t have its cake and eat it without having a bad bout of deficit-debt indigestion. And its effort to restore US hegemony via External policy (aka trade restructuring) may no longer be possible either. If so, the US twin deficit will be the eventual casualty.

Overlaid on all this is the realization that Neoliberal Monetary Policy has run its course and is exacerbating all of the above. Neoliberal low interest rates—so important to US multinational corporations’ foreign profits realization and to a low dollar exchange rate—appears increasingly unsustainable. Neoliberal Monetary Policy since the mid-1980s has been in the service of providing low cost money for US business, low dollar valuation for US multinational corps, cheap money for US bankers and borrowers, and a source of annual trillion dollar income redistribution for capitalist investors via stock buybacks and dividend payouts. In short, it has subsidized capital to the tune of trillions of dollars—in the process artificially boosting financial asset markets and speculative profits. In so doing, however, the chronic nearly four decades of cheap money & credit (and therefore the massive debt increase) ultimately engineered by the Federal Reserve and other central banks, has in effect ‘broken the back’ of monetary policy as a force for stimulating the real economy during periods of economic slow growth and recession. The chronic long term and artificially low interest rates have had several effects. One is provoking intensified inter-capitalist competition in the form of ‘competitive devaluations via central bank monetary policy’.

In the 1930s decade, competitive devaluations by government declaration or fiat played a major role in preventing the global capitalist economy from economic recovery from depression. Today the same is occurring, but through the intermediary of central bank monetary policy. As the US attempts to drive interest rates down, other world economies do the same and more so by central bank rate policies as well. The result is currency instability outside the US and capital flight to the US as other currencies fall. That capital flight’s destination drives up the value of the dollar. And that disrupts US trade restructuring objectives. So the nearly four decades of US central bank massive liquidity injections in the economy, designed to drive down interest rates, actually results in a rising dollar instead of its decline in response to interest rate cuts.

What the foregoing represents is that Neoliberal Monetary Policy increasingly contradicts Neoliberal trade restructuring and low dollar neoliberal policy objectives. Just as contradictions prevent the three objectives of Neoliberal Fiscal Policy, so too is Neoliberal Monetary Policy today serving as a contradiction to Neoliberal trade restructuring. The reflection of this contradiction on a personalities level is Trump’s simultaneous attacks on China president, Xi, as the US is thwarted in trade restructuring, and on US Federal Reserve chair, Jerome Powell, as he is blocked in the area of driving down interest rates.

Contradictions of Neoliberalism

At the highest level, Neoliberal Fiscal, External, Industrial, and Monetary Policies are ‘out of synch’. Or, more accurately, are increasingly in contradiction to one another. Ultimately this combined ‘grand contradiction’ is due to the financial restructuring and globalization of the international capitalist system since the 1980s, as well as the multiple other material forces that have been evolving within global capitalism during its current four decade Neoliberal phase. In other words, the evolution of the US and global capitalist economy itself is at the heart of the growing contradictions within the Neoliberal policy mix. This is no different than prior capitalist policy regimes that arose in the early and mid-twentieth centuries in the US. The new policy mix, associated with the prior natural restructuring of capitalism, at first serves to integrate and stabilize that restructuring. But the policy mix eventually comes into contradiction with the real evolution of the capitalist system. Under the new natural restructuring and changes in the system the prior new (now old) policy regime becomes a drag on the continued evolution of the system. It slows its growth. It destabilizes both its real and financial sectors. Capitalist agents—i.e. investors, corporate leaders, politicians and policy makers come to realize a more structural change must occur in the policy regime as well. Thus the 1907-16 policy regime, new at the time, eventually no longer serves its purpose. It gives way, after a crisis period, to a new and different 1944-53 policy regime. And that too begins to serve its purpose, as it did by the 1970s, to be replaced by the Neoliberal policy regime that followed.

The question today is whether the Neoliberal policy regime has now ‘run its course’. If not, then perhaps the Trump restoration might be successful. But if Neoliberalism has reached ‘the end of its rope’ (meaning it no longer continues to serve capitalist expansion and interests), then the Trump current attempt to restore Neoliberalism—even in a more aggressive 2.0 version—is doomed to fail.

In the 1970s decade, a particular evolution of material forces gave rise to, and drove the evolution, the Neoliberal policy regime from roughly 1978 up to the onset of the crisis of 2008-09. Some of the forces that gave rise to Neoliberalism are inherent to the evolution of capitalism itself—i.e. are thus ‘natural’. Others are due to changes in the character of US capitalism brought about by Neoliberal Policy—i.e. are ‘induced’. How then might have these ‘old’ material forces changed over the past four decades of Neoliberal policy regime hegemony? What new material forces have already emerged since 2000? Or are about to emerge next decade? What might these various material forces look like in the decade to come? Will they render Neoliberal Policies increasingly contradictory in the 2020s decade ahead, and therefore make Neoliberal policies even more ineffective? And more contradictory? To put it alternatively, will the new emerging material forces result in the continued, and even more fundamental, failure of Trump policies; and any similarly-minded successors to Trump attempting to restore the Neoliberal policy regime?

It is becoming increasingly cleaer that the material forces—whether old, new, and emerging—likely present a challenge that Neoliberalism cannot resolve. That means the new policy mix of the 2020s will be even more aggressive and violent in its implementation and effect than has Trump’s 2.0 failed restoration thus far. Or, whatever replaces Neoliberalism as we have known it, will be fundamentally different, including perhaps more progressive than imagined.

(Note: Part 3 in this series, ‘The Scourge of Neoliberalism’, will address the material and technological changes that have been developing in recent decades within US and global Capitalism—i.e. forces that constitute a source of contradictions that, next decade, will result in the demise of the Neoliberal policy regime that has dominated US Capitalism since the late 1970s).

Dr. Jack Rasmus
January 2020

Dr. Rasmus is the author of the ‘Scourge of Neoliberalism’, published by Clarity Press, January 2020, and other recent books on late US and global capitalism, including ‘Central Bankers at the End of Their Ropes’, ‘Systemic Fragility in the Global Economy’, ‘Looting Greece: A New Financial Imperialism Emerges’, Obama’s Economy: Recovery for the Few’, and Epic Recession: Prelude to Global Depression. Dr. Rasmus’ website is kyklosproductions.com, his blog jackrasmus.com, and his twitter handle is @drjackrasmus.

posted February 6, 2020
Trump’s State of the Union Speech: US Political Crisis Deepens

On Tuesday, February 4, 2020 Donald Trump delivered a State of the Union speech that revealed his election 2020 strategy, designed to roil and mobilize his political base, and to declare to the Democrats that his political war with them will now escalate further.

If anyone thinks the recent impeachment and Senate trial was the high point of the growing conflict between the two political parties, Republican (correct that: Trumpublicans now) and Democrat, they haven’t seen anything yet. The worse, much worse is yet to come in the months leading up to the November 2020 elections.

The visual personification of this intensifying conflict was evident during Trump’s speech: As he began speaking Trump turned to vice president Pence and House of Representatives leader, Pelosi, both sitting behind him on a dais. Trump handed them his written speech, as is the tradition. He then abruptly turned away from Pelosi refusing to shake her extended hand—as traditional decorum has always required. Pelosi, shocked by the snub, after Trump finished, in turn symbolically tore up the written speech. All this was caught on national TV. The event was symbolic of the fight will now escalate and get even more vicious in the run up to November.

If Trump’s speech summarized the conflict up to this point, the exchange between him and Pelosi reflected the ‘gloves off’ political conflict now about to begin. As the saying goes, “We ain’t seen nothing yet”!

It is not difficult to understand the true meaning of Trump’s SOTU. Above all, it represents a toss of ‘red meat’ to his radical political base. There was very little in it about what he proposes for the country in the future, as is normal for a SOTU speech. Instead, what we got was a speech designed to agitate and mobilize his political base based on themes of fear (of the immigrant) and hate (of Pelosi and the Democrats). The dish of fear/hate was sauteed with a large dose of lies and misrepresentations, and served up with a new recipe of racism designed to help Trump hold on to the swing states that delivered his electoral college majority in 2016. The speech marks what will be a significant escalation of extraordinary political attacks by Trump and his movement against his Democrat opponents in the election. And if past practice is any clue, the Democrat leadership is likely unprepared for what is to come.

The ‘Red Meat’ to the Base

The speech was replete with what Trump’s base wants to hear, with no punches pulled. Once again, as in 2016, the immigrant is the dangerous criminal and killer. The immigrant is of course anyone of color, but especially Latinos crossing the southern US border, and anyone sympathetic in any way to them or even those already legally here. Trump wants to protect us from the immigrant. And according to Trump’s appeal to this base: the Democrats want to embrace him, protect him with taxpayer money, and thereby identify themselves with the criminal-killer element among us.

In the same breath as he reiterated his politically successful anti-Latino racist appeal, Trump touted his “long, tall and very powerful” wall, claiming 100 miles have already been built and another 500 coming next year. More money for the wall will thus by inference be necessary. Or else we may all suffer the fate of the anecdotal killer-criminal-immigrant, who of course is Latino.

A variation on this illegal (read: Latino) ‘enemy within us’ theme is the Sanctuary Cities movement and, by association, the entire state of California which has declared itself a sanctuary state. Trump spent a good deal of time in his speech attacking sanctuary cities. In the past, his bete noir was a person (Hillary, Pelosi, etc.) Now it’s a geography, even a state. Watch out California. Trump is about to swing his ax, far and wide, and in your direction!

Like most demagogues, Trump likes to make his case with anecdotal, emotional appeals. Thus, with a fear-mongering, melodramatic anecdotal example early in his speech he cited a criminal illegal running amuck, shooting everyone in California. That cleared the way for his proposal for legislation to go after Sanctuary Cities, in particular in California. The legislation proposed was the ‘Justice for Victims of Sanctuary Cities’ Act that would allow individuals to sue Sanctuary Cities. It is clearly a move to open the door for radical elements of his base to protest and engage in even more militant, perhaps even violent, action—-not unlike how anti-abortion radicals were encouraged in the past to physically attack abortion clinics and threaten and assault doctors and nurses.

Like all extreme nationalist and proto-fascist movements, there must be an ‘enemy within’ that is identified as the source of the country’s problems—including those who might defend them.

Another ‘red meat’ toss to his base in his speech was his proposal for legislation to bar late term abortions. Still another dish offered up was allowing prayer in public schools, which he followed up with a pledge to increase federal funding to promote it.

Another fresh bone thrown to the base was Trump’s strong endorsement of 2nd amendment gun rights. In contrast, throughout the speech not a word was said about mass killings at US schools or the fact that studies show a shooting and killing goes on in schools in America at least once every day somewhere.

His base was no doubt pleased as well with his solution to the growing climate crisis: somehow business and the public will plant 1 trillion more trees, he proposed. That would presumably create enough oxygen to prevent the oceans from acidifying, glaciers from melting, and Australia and California from burning.

There was also an attack on public schools. Trump claimed they were failing everywhere and that every parent should have the choice of sending their kid to whatever school they wanted, and receive scholarship money paid by the taxpayer to send them to a private school of their choice. Trump touted the ‘Educational Freedom & Scholarship Act’. In one of at least a half dozen examples, best described as ‘gallery melodrama’, he turned to the gallery in the House chamber and introduced a young black girl and her mother, announcing on the spot he personally was giving her a scholarship under the Act.

One of the more disgusting examples of ‘gallery melodrama’, that has become ready fare apparently in these SOTU speeches in recent years, was Trump’s introduction of the right wing radical talk show pundit, Rush Limbaugh. Long an ideologue of the radical, extreme right who has dished up lies and misrepresentations on a daily basis, Limbaugh was introduced as having stage 4 lung cancer. That was to set up the sympathy appeal, of course. Trump then announced he was giving Rush the Presidential Medal of Freedom. Rush acted surprised. The person next to Rush then immediately pulled out the medal and draped it around Limbaugh’s neck. We’re supposed to believe it was all unrehearsed and spontaneous. Not a dry eye in the gallery. Trump’s message: all you liars and hate mongers on the right out there, you too can become a hero under Trump. Just keep up the good work in the coming election year!

The New Racism Card

Democrats should take note of Trump’s new racism strategy. He clearly is now appealing to the African-American voter—even as he writes off and declares the Latino as the illegal alien threat.

In at least six episodes of ‘gallery melodrama’, Trump’s subject was a black American. In addition to the young girl and her mother, noted above, Trump introduced a black former drug user who became a businessman, enabled by Trump’s ‘opportunity zone’ legislation—in fact a piece of legislation designed to give special tax cuts to businesses in certain cities. Then there was the black kid who wants to become an astronaut. He was introduced with his 100 year old grandfather, a former Air Force officer, Charles McGee, who served in Korea and Vietnam, next to him. Trump announced he just made McGee a brigadier general. That kills ‘three birds with one stone’, as they say: a kudo to senior citizens, to blacks, and to the military all in one melodrama bundle. Trump then proposed an increase in funding for black colleges.

In only one, and very brief, ‘gallery melodrama’ episode during the speech was a Latino introduced. Unlike all the black kids and moms, he was a Latino ICE officer. Not as much emotional sympathy appeal there.

See where this is going? Up with blacks; down with Latinos? Split the minority vote.

Why the strange pro-black strategy? A strategy launched, by the way, a few days earlier in his unprecedented election Ad in the super-bowl, where Trump took credit for the bipartisan criminal reform legislation just passed, by showing a middle aged black women crying in relief now that Trump had released her relative from prison. Trump now a defender of African-Americans? A reformed former racist? Trump the declarer that Africans lived in shithole countries?

It’s not that Trump has overnight given up his racist attitude against African Americans. What he’s doing is counting the electoral votes in the swing states. The new appeal to blacks is designed to provide him a margin of extra votes in those swing states, a safer margin in the red states, especially the south in places like Georgia, all to ensure he wins the electoral college votes in those states as he did in 2016. That black vote margin is needed to offset the possible loss of middle class white women in the swing states that are, according to polls, put off by Trump’s aggressive and off the cuff tweets and statements.

Manipulate blacks. Mobilize white nationalists by vilifying Latinos and other peoples of color. Split the minority vote, in other words.

Trump’s Lies by Commission

As heard so often from Trump, much of his SOTU speech was laden with outright lies. In the roughly one-third of it devoted to the economy, this was especially the case. (Another one third of the speech was devoted to domestic issues and another third to foreign policy).

First there was Trump’s claim that the under him the US economy is “the best it has ever been” in US history. But what are the facts? Not so in terms of US GDP. Trump’s roughly 2% growth rate today is not that much different from the average since 2000. Nevertheless he said “Families are flourishing”. Oh? What about the more than half of families today who have less than $400 to their name for emergencies? Or the more than half in each of the last two years who say, in polls, they received no wage increase at all in either year? Or what about the tens of millions of millennials and youth indentured with $1.6 trillion in student debt and can’t get homes or families even started?

In the speech, Trump claimed the unemployment rate was the lowest ever. But that’s the so-called U-3 rate which covers only full time workers, whose employment ranks by the way have been declining in absolute terms. It further excludes altogether the roughly 60 million US part time, gig and temp workers. If they were accurately estimated and included in unemployment figures, the true unemployment rate would be 8%-10%.

And what about wages? In the speech Trump repeated the oft-heard statistic that wages have been rising on his watch. But behind that figure lay several deeper facts: first, there’s the more than half of the labor force who acknowledge they received no wage increase at all last year or the year before. That suggests it is the top 10% of tech, professional, and other workers who are getting most of the wage gains. Moreover, the wage figures and gains noted by Trump are an average: if those at the top get more, those at the middle and below are getting less or even nothing. In addition, the numbers are for full time workers, leaving out the 60 million part time and temps. Finally, they’re wages not adjusted for inflation.

The real picture is that unemployment is much higher and wages are stagnating for the vast majority or worse. But this didn’t stop Trump in his SOTU speech from saying “companies are coming back to the US” and creating jobs. Or that this is a ‘blue collar boom’ with wages rising.

Trump also declared in his SOTU that he would protect social security and Medicare. But in his recent speech to the billionaire crowd in Davos, Switzerland he let it slip to the well-heeled in attendance he would be going after both once he won the election again. One wonders which audience he’s speaking the truth of his real intentions to.

In the SOTU he also gave support to infrastructure spending. But his prior proposals define ‘infrastructure investment’ as tax cuts for real estate developers.

He also declared in the SOTU speech that his recent proposals would lower prescription drug prices. But by this he really meant consumers being gouged by the Pharma companies would get to see how much the various drugs were being raised, in order to choose which one that would gouge them less. Market transparency does not mean lower drug prices. Big Pharma is not a competitive market where the consumer can choose among multiple offerings.

An even more outrageous, blatant lie was Trump’s declaration he was giving his “ironclad” guarantee that those with health related, pre-existing conditions would have access to health care–when in fact what he has proposed to date are various measures to roll back pre-existing conditions guarantees.

Trump’s most ridiculous lie was that Medicare was socialist. Here he was obviously attacking the growing support for a Medicare for All solution to the health crisis, increasingly supported both by the public and within the ranks of the Democrats. As he put it, 180 million Americans love their private health insurance. And he promised not to let the socialists take that away, even though it’s quite clear that 70% of the US population is now dissatisfied with private health insurance and want something better. And if Medicare is socialist, does that mean the 50 million seniors on Medicare and Social Security are socialists as well? Add the millennials and seniors, and America must have already gone socialist!

One of the more disgusting outright lying claims of Trump was his comment that, under his regime, 7 million on food stamps had left the program. But what he didn’t mention was he and the Republicans just declared 700,000 no longer eligible for food stamp support, including single moms with kids.

Trump’s SOTU: Lying by Omission

Lies may be committed by carefully not elaborating on topics. Here Trump excelled as well in his SOTU speech. For example, he boasted that the stock markets had risen in value by $12 trillion on his watch. But what he didn’t say is that more than $1 trillion every year has been passed on by corporations to investors and stock holders in the form of stock buybacks and dividend payouts. That’s what drove the $12 Trillion, making the 2% of the voters who own most of the stock richer than ever in history.

He then glossed over the recent signed China-US phase 1 trade deal as well as the NAFTA 2.0 USMCA trade deal. he said they were great achievements, but refused to indicate in what sense. In recent weeks he has declared China would buy $100 billion more in US goods this year as part of that deal. But the fact is China never agreed to that and most economists estimate it will be well less than $50B, and maybe not even that now that the coronavirus is undermining US-China trade.

And so far as the USMCA is concerned, Trump in the SOTU speech reported it will produce 100,000 new US jobs. But even a cursory reading of the terms of that deal show there are no measures designed to bring back jobs from Mexico to the US. In both the trade deals, there’s really ‘no there there’, as economists are now beginning to determine. Both the China and USMCA trade deals are just old wine in new bottles, as they say, corked up with a lot of bombast, hyperbole, and factual misrepresentation.

Missing totally from the SOTU speech was any reference how Trump’s multi-trillion dollar tax cuts for corporations and investors and war spending have driven the US budget deficit in excess of $1 trillion a year, with trillion dollar additional deficits for another decade! In short, unlike all Republican presidents before him, in his SOTU speech Trump said nothing about the accelerating deficit, and in turn the $23 trillion national debt, or how he proposed to address it in the coming year or beyond.

In yet another example of lying by omission, in the speech Trump claimed that low wage workers had experienced an increase of 16% in wages on his watch, but then didn’t bother to explain that most of that was due to the raising of minimum wages by governors and legislatures in the ‘blue’ Democratic states.

Lying by omission means taking credit for things you never did, or were done by others. That’s become a norm for Trump, and he kept up that practice throughout the SOTU speech.

Foreign Policy Fantasies

Trump has had no actual foreign policy accomplishment during his entire term in office. Nothing came of the North Korea deal. He was able to get only a few token European countries, like Greece, to increase their NATO spending a little, but not much. His attempted support for a coup in Venezuela collapsed. (That didn’t stop him by bringing to his speech the US selected puppet, Guido, and introducing him in the gallery). His trade deals produced very little in actual gains for the US ballooning trade deficit. He achieved nothing in Syria or Turkey except to allow Russia to increase its influence in both. And he failed to get Iran to the bargaining table to renegotiate the nuclear deal.

What he did declare in his SOTU speech as victories in foreign policy was his reversal of the Obama administration’s opening to Cuba. His recent launch a new Mideast Israel-Palestine initiative that was dead on arrival. The claim he destroyed ISIS, when in fact it was mostly the Iranians, Kurds, Russians, and Turks that did it. And his declaration that peace talks in Afghanistan to end that conflict were making “tremendous progress”, when in fact a deal isn’t even close. And, not least, his assassination of the Iranian general, Soleimani, that almost pushed both countries over the brink of war. Not much there in foreign policy either.

The SOTU Message: Domestic Political Warfare

Where Trump has succeeded is in his domestic political war with the Democrats. As he noted in the SOTU speech, he has approved 187 new Federal Court judges and two Supreme Court judges, giving him a clear majority in the Judiciary. The US Senate has become no less myopically committed to him than his political grassroots base and media machine. Senate leader, McConnell, has proven to be one of the most obsequious Senate leaders in history. With the Judiciary and one house of Congress firmly in his pocket now he has not been reluctant to break whatever rules and norms he deems necessary.

Having outmaneuvered the Democrats in the Mueller Report and Russia interference affair, and now as well in the impeachment attempt, Trump is now even more confident no doubt that he can run roughshod over Pelosi and the Democrats in this election year. And he will.

His SOTU speech was in effect a declaration of his intent to do so. And the confrontation at the end of the speech between himself and Pelosi—-Trump refusing to shake her extended hand and Pelosi then ripping up his speech—is symbolic of the political dogfight about to come. Throughout it all, Trump’s approval rating has survived in safe territory. His red state allies are intent on ensuring his electoral vote majority via both gerrymandering and voter roll suppression. His grass roots minions are itching to release more aggressive protests, demonstrations and action. His strategists are formulating a new racist appeal to split Democrats’ historical minority base of support.

Meanwhile, the Democrats themselves are sliding into their own internal conflict, with the corporate wing planning to scuttle Sanders by any means necessary and replace him with Bloomberg as their candidate at the convention.

In short, Trump’s SOTU speech was less about the state of the union and more about the state of Trump’s re-election and the Trump strategy to win a second term in November. And it appears he may succeed in domestic politics, while having clearly failed in economics and foreign policy.

Jack Rasmus
February 5, 2020
copyright 2020

posted January 21, 2020
Trump’s Feeble Phase 1 US-China Trade Deal

With the announcement today, January 16, 2020 of the signing of the US-China Phase 1 ‘mini’ trade deal, and the US Senate’s simultaneous ratification of the USMCA ‘NAFTA 2.0’ trade agreement, Trump’s so-called ‘trade wars’ are at an end. In election year 2020 nothing of additional significance will be achieved by Trump with regard to restructuring US and global trade relations. While Trump himself will make further threats and claims, likely aimed at the Europeans, no country will agree to any changes this year when the possibility exists of Trump leaving the presidency next November 2020. To repeat once again, the Trump trade wars are over. As the comedian once said: ‘what you see is what you get, baby’.

And what do we see in the much-hyped and grossly exaggerated Phase 1 US-China trade deal?

China Phase 1 Deal: A Feeble Deal on Trade

Behind the typical Trump bombast, hyperbole, and outright lies, the China Phase 1 deal was perhaps best summed up in the front page of the Wall St. Journal on January 13, 2020, by the Ben Steil, Director for International Economics for the Council on Foreign Relations (i.e. the major think tank for the US capitalist class): “China is set to do little more than restore agriculture purchases and offer some nice words on financial services and intellectual property…Trump could have had that two years ago without the tariff damage”.
What’s really in the Phase 1 deal? What has Trump actually achieved through nearly two years of negotiations, tariffs, and threats and intimidation in the nearly two year long China trade negotiations? And what have been the consequent negative impacts on US households, businesses, farmers, and the US and global economy?

(51% Majority Ownership)

First, in Phase 1 there’s the claim that US business, especially US bankers, now have more access to China markets. They can have 51% ownership control of their operations in China. Trump claims he achieved that. But it’s just another Trump lie. The fact is China began implementing the 51% financial ownership rule back in 2018. European banks have already set up full ownership operations there. So has Goldman-Sachs, the premier US investment (shadow) bank. Trump didn’t get anything there China already offered and gave to others.

(Currency Manipulation)

Trump says the deal means China has agreed to no longer ‘manipulate’ its currency. Trump this past week then officially removed the US declaration that China was a currency manipulator. The importance of currency manipulation is that Trump wants to block China’s potential to devalue its currency, the Yuan, which would offset any US tariffs easily. But China has not been a currency manipulator at all. In fact, it has been entering global money markets to buy and sell its currency to ensure that it remains within a stable range of exchange to the US dollar no greater than 7.1 to the $. If anything China has committed significant resources to ensure the Yuan does not devalue. That’s the opposite of a currency manipulation to devalue and offset US tariffs. China could have easily done so throughout the last 22 months of trade negotiations with the US, but it didn’t. The claim of China as currency manipulator has been a lie from the beginning, used by Trump (and others before) to try to label China as the problem with the American media and public. It’s worth noting as well that while China has spent billions to ensure its currency does not devalue or rise, the US dollar has been allowed to rise significantly the past two years. That has caused other global currencies, especially those of emerging market economies like Latin America, to devalue dramatically and plunge those economies into recession. The US has been the great currency manipulator and destabilizer—not China.

(IP and Tech Transfer)

Trump also claims the China Phase 1 deal means new limits on China forcing technology transfer of US companies doing business in China and on intellectual property. (Protecting intellectual property mostly means for the US that US pharma companies will enjoy better patent protection—i.e. prevent competition).

But whether IP or tech transfer, there have been no details released by the Trump administration as to how this is so. In fact, as if January 15, 2020 the text of the Phase 1 deal is still not available in either English or Chinese, according to the New York Times.
All we’ve got in the Phase 1 deal, according to those who have had access to date, is China’s promise to punish China firms that obtain sensitive tech information via acquisitions; or stop requiring that foreign companies turn over technology to China as a condition of doing business in joint ventures in China.

But certainly in any joint venture tech information can be obtained by means other than formally turning it over to China government officials. And doesn’t a company that acquires another have legal right to all its product information? According to a Derek Scissors of the American Enterprise Institute, in the Phase 1 deal the Chinese “have committed to continue doing the same thing they have always been doing”. What China refused to agree to is to refrain from engaging in cybertheft of companies—since of course the US refused to agree to the same.

So forget about any big breakthrough in the Phase 1 deal associated with IP and/or tech transfer as well.

($100B in US Farm Goods Purchases?)

Trump’s big claim about Phase 1 is that China has agreed to buy $200b more in goods over the next two years, $100b a year roughly divided between $50b for farm and $50b nonfarm goods and services. But was this a new gain from negotiations and tariff intimidation? And will it be actually realized over the next two years? And is it really $50b a year more in farm purchases?

First, China had already offered in 2018 to increase its purchases of US goods and services by $1 trillion over the next five years. So it already put that number, $200b a year, on the negotiating table. But that was two years ago.

But most economists today doubt that China will buy anything near $50b a year in additional farm products from the US. According to the January 15, 2020 New York Times, those who have actually seen the agreement indicate China has actually agreed to buy only $16b more a year over two years. The $50b claim by Trump thus quickly lowered to $40B. Furthermore, the $40B was not new additional purchases.

That $40b is comprised of $24B/yr in farm goods bought by China in 2017, plus the $16B more commitment per yr. for 2020 and 2021. Farm purchases fell in 2018 and 2019. So the $32B just mostly makes up for the shortfall the last two years. At one point in spring 2019 China farm purchases were as low as $7B a year.

So the $16B more per yr. represents a restoration of what China was buying in 2017, adjusted to make for the declines while the trade war was underway, and it all expires after just two years. So Trump’s boast of $100B in farm goods reduces to $32B in fact, which mostly makes up for reduced purchases the past two years, and returns to the pre-trade war 2017 level of $24B! Nearly two years of trade war to return to the status quo ante of 2017!

Moreover, trade experts are also saying that even the $16b more in farm good purchases will be difficult to achieve. During the last two years China has diverted its purchases of soybeans and other farm goods to Brazil and other countries. And China has said the Phase 1 will not mean any change in its prior contracts with other countries. It won’t cancel Brazil in order to fulfill US commitments under Phase 1. So where’s the big surge in China purchases of US farm goods? It’s more like a restoration, with no commitment to increase after two years. And it leaves US farmers with a lot of uncertainty as to future sales plus not enough time, and thus greater risk, to invest in expanded production to meet China’s purchases
.
Furthermore, China sees even Phase 1 farm purchases as a goal, not a firm absolute commitment. Its chief trade negotiator, Liu He, has been quoted as saying purchases will occur “according to the needs of the (Chinese) consumer and as market conditions determine”. Think of the latter phrase “as market conditions determine” as a code word that means China may purchase more depending on whether Trump reduces US tariffs more in tandem.

(Trump $370B Tariffs Remain)

Trump has declared he won’t reduce tariffs on China any further. It now stands as 7.5% on $120B and another 25% on $250B. Trump says he needs to retain the tariffs in order to ensure China abides by the other terms of the agreement. But he can’t have his cake and eat it—i.e. China purchases $100B more a year but Trump keeps $370B. China has made it clear, more purchases are linked to lower tariffs.
So long as Trump’s $370B tariffs remain, it will become increasingly clear that China intends to purchase far less than the $100B a year. It just won’t happen regardless what Phase 1 says. Farm purchases in particular won’t come anything near to even the $32B more ($16B/yr), reported January 15 in the New York Times, let alone to Trump’s inflated claim of $40-$50B.

Trump may believe he needs the continued tariffs to enforce the agreement’s terms by China. But China’s quid pro quo enforcement ‘tool’ is to simply slow or delay its official purchases “as consumer demand and market conditions” dictate. Its tariffs vs. not fulfilling purchase commitments due to ‘market conditions’.

(Manufacturing & Services)

In addition to the $32B more in farm purchases, reportedly Phase 1 calls for another $78B in manufacturing and $38B services purchases over next two years as part of the Phase 1 deal as well. But that too might not be realized. Most of China’s manufacturing purchases is for Boeing planes, now plagued with shipment cancellations worldwide due to the 737max; and the $38B in services purchases involve mostly Chinese purchase of US education services and tourism, both of which are being sharply cut back by Trump as the US policy now is to discourage Chinese students and research academics coming to the US, and as China tourism to the US slows as relations between the two countries continue to deteriorate.

US auto exports to China will not be affected much either. There’s a major slump in China auto sales, China is committed to rapidly building up its own auto industry, and US companies are racing to move production to China anyway, all of which would reduce the need for China to import autos from the US over the next two years.

Finally, there’s the commitment of China to buy $27B a year more in US energy products, oil and natural gas. The US benefits having an outlet for its rising glut of natural gas and oil, which it is betting on exporting in order to keep supply and prices high in the US market. But should a global recession occur in 2020 or after, China ‘market needs’ and demand for US oil and gas will certainly decline and the commitment to buy in this area will likely fall far short of the annual $27B as well.

(Nextgen Tech War)

Behind the trade was with China has always been the more important tech war between the two countries. The tech war is not be confused with IP or even with tech transfer by US companies in China. It’s much bigger. It’s about next generation technologies like Artificial Intelligence, Cybersecurity, and 5G wireless. These are the technologies of the industries of the next decade. They are also the military technologies of the future. Which country dominates these technologies achieves military hegemony by 2030. Both China and the US know it. And the ‘war’ between them has been occurring behind the cover of tariffs and trade war.

But with the Phase 1 trade deal it is clear that the tech war has been now decoupled from the trade war. It will be (and has continued to be) conducted by other means than tariffs. The US will continue to go after its allies with sanctions should they adopt China tech in these areas. The offensive against the giant China telecom company, Huawei, now the world leader in 5G, is the harbinger of a much greater, wider, and longer conflict between the US and China over nextgen tech.

The China-US tariff/trade war may be over, but the China-US tech war has just begun and will now accelerate.

Trump believes he can engage China over tech in Phase 2 negotiations. But Phase 2 is a fiction. It will not happen. Even if the two countries’ representatives meet it will be a fruitless discussion. Neither will ever come to an agreement. China will never trade next gen technology for tariff reduction. It won’t trade tech for anything the US can offer.

Artificially Intelligence and 5G are key to the development and functioning of next generation hypersonic missiles and hyper-smart torpedoes; for future military drone technology and targeting; and for future battlefield communication and coordination between machine and human. So far the US is ahead in AI but behind in 5G. It has no latter product of its own. Globally, its Huawei and Europe’s Ericsson that are leaders in the product development. The US once premier tech company, AT&T, is now preoccupied with investing in entertainment software and content, driven by its shadow bankers demanding more profits sooner than later. The US is thus forced to try to stop Huawei instead of out-competing it in tech development of 5G.

(Subsidizing State Owned Enterprises)

Not in the Phase 1 deal is the Trump-US complaint that China continues to subsidize its government owned enterprises by enabling low priced costs and inputs to production paid for by China government. But the US engages in massive subsidization of US companies worldwide as well. It does so by other means. Consider the massive $5.5 trillion tax cut of 2018 for corporations, businesses and investors. The US subsidizes and aids US corporate competitiveness worldwide by tax relief. It also subsidizes the cost of financing exports with the US Export-Import bank. It provides business virtually free R&D from US taxpayer financed technology developed by DARPA, the NSA, National Institutes of Health, and many other means. So it’s really a joke for the US to charge China is engaging in uncompetitive subsidization of its government owned companies.

The Cost of China-US Trade War

Any proper assessment of the Phase 1 deal requires consideration not only of what has been gained (or not gained) but also what has been the cost of the 22 month trade war to the US economy.

Has the trade war actually reduced the US trade deficit—with China and with the rest of the world? Not really.
The deficit in goods with China was just under $350b when Trump assumed office, according to the US Census Bureau. It surged to about $410B by end of 2018. It has since come down to about $350B again. So Trump has merely reduced the trade deficit with China equal to the amount of the deficit increase he oversaw in 2017-18! With the Phase 1 deal the deficit will almost certainly begin to rise once again.

On a global scale, as the deficit with China ballooned and then leveled off at pre-Trump levels, under Trump the US goods trade deficit with the rest of the world continued to accelerate rapidly under Trump and still continues to do so. From roughly $375B when Trump entered office in January 2017, the US deficit has surged beyond $500B by end of 2019. So much for Trump’s trade wars apart from China!

What was the cost of reducing the surge in the China trade deficit he created?

The US National Bureau of Economic Research estimated that Trump’s China tariffs were fully passed on to US companies in all industries except steel, where half were passed on. It cost US businesses $42 billion. And they passed most of it on to consumers and US households.

A study by the Federal Reserve Bank of New York (authors Weinstein and Redding), “found that approximately 100 percent of import taxes fell on American buyers” (New York Times, January 7, 2020, p. B4).

US farmers took a big hit. Trump provided $28B to the farm sector in new subsidies, the cost of which added to the US budget deficit (now more than $1 trillion) and rising national debt (now more than $23 trillion). Most of the subsidy went to large farmers and agribusiness, however. Farm income contracted throughout 2018-19. Farm loan delinquency rates have now risen to a six year high, per the FDIC, and Chapter 12 farm bankruptcy filings are highest since 2012.

The trade war devastated US business confidence with the result that business investment in the US contracted throughout 2019.
US consumer households experienced a reduction of $806 dollars in real income spending due to the tariffs.

And estimates are that Trump’s trade wars have reduced global investment and GDP by as much as $700 billion.

Concluding Remarks

Trump administration spokespersons—Larry Kudlow Trump’s Economic Advisor and Steve Mnuchin, Treasury Secretary—are, per latest report, peddling the prediction that the US economy will grow by up to 0.75% more in GDP terms in 2020 as a result of the Phase 1 China deal. But that is based on the absurd assumption that China will buy $100B-$150B more in US imports in 2020—a misrepresentation which, as was explained above, is as ridiculous as it is false.

No doubt the media will continue to spin the exaggerations, although nearly all economists’ estimates of the Phase 1 deal conclude ‘there’s no there there’, at best.

As minimal are the gains from the Phase 1 agreement with China, Trump’s ‘other’ trade wars and deals, including the also much heralded USMCA (NAFTA 2.0), produce even less in net terms. Whether the US-South Korea free trade agreement, the Trump tariffs on steel and aluminum worldwide, Trump’s recent tariffs on European wine and spirits, or his verbal understandings with Japan on trade—all represent even less achieved than the minimal recent agreement with China.

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, where chapter 8 addresses the origins and evolution of Trump’s trade wars in further detail. The book is now available at jackrasmus.com, Clarity Press, Amazon, and other locations. Dr. Rasmus hosts the Alternative Visions radio show on the Progressive Radio Network, blogs at jackrasmus.com, and tweets at @drjackrasmus. His website is http://kyklosproductions.com

posted January 14, 2020
Trump’s Iran ‘Punching Bag’: US Provocations to Continue in 2020

Dr. Jack Rasmus
copyright 2020

“Trump’s assassination of Iran’s general and senior diplomat, Soleimani, was a clear provocation by the US, designed to produce a further escalated military response by Iran. That did not happen. Iran did not take the bait. It responded minimally and appears to have done so in a way to avoid US deaths or even major US asset destruction.

If Iran had escalated militarily, which it was capable of doing, it would have fallen into Trump’s trap. Trump was prepared to unleash a greater military response on Iran. He would have had his ‘war’, i.e. his great distraction from his pending impeachment trial, as well as a major boost to his political base in the current election year.

Trump’s Baiting Iran To Escalate

Had Iran taken the bait, Trump would also have been able to bypass the War Powers Act before militarily escalating. The Act allows an unlimited and immediate US attack on an adversary that has attacked US forces. Up to now, Trump has had to explain to Congress, especially the US House of Representatives, why he had assassinated Soleimani in the first place. That was clearly an ‘act or war’ according to international law. And Trump had bypassed Congress before doing so, which the Act and prior precedents have required. A major Iran counterattack on the US would have put the issue of Trump’s bypassing the Act by assassinating Soleimani without discussing with Congress to bed. The new escalation and conflict would have become the center of debate in the US–not the assassination and how Congress was bypassed and ignored.

Iran’s missile launch yesterday against two Iraqi bases, one of which reportedly had no US forces, was clearly a measured and minimal response. It appears the missile launch may have been purposely designed to do minimal damage even to US military assets. That no photos of any damage have been released by the US suggests there wasn’t much. And no US forces were killed. Either Iran’s missiles and targeting are worthless; or Iran purposely intended minimal, or even no, effective damage.

Without physical evidence of extensive damage, and no American deaths from the missiles, it was, and remains, difficult for Trump to escalate military action further thereafter. Moreover, Iran’s statement after the launch that it had “concluded” its response made it further difficult for Trump to escalate a US military response after the launch.

Trump therefore trotted out before the cameras and declared a ‘victory’ in the exchange: a successful assassination in exchange for a dozen missiles that largely missed their targets and did no damage. In other words, Iran had done little in response to the US assassinating it leading general. Trump got to look tough to his political base at home after engaging in a foreign policy adventure, as the 2020 election takes off.

But the Trump/US/Neocon assault on Iran is not over. As neocon John Bolton has recently tweeted, the US was planning to assassinate Soleimani for some months now and had its plan ready to go. It just now pulled the trigger. Trump and the US were escalating the conflict steadily throughout December, as the US launched attacks on Iranian militia bases in Iraq, provoking the desired response of the militias assault on the US embassy in Baghdad. Trump in turn escalated the confrontation by assassinating Soleimani. Time will reveal what happened between the period of the US successful provocation of the militias and the subsequent assassination.

As the 2020 election year in the US continues, Trump will almost certainly replay this Iran provocation card again. It’s proved successful thus far. Iran is in a box: if it responds minimally, Trump declares a short term victory and looks good to his base in the election year; if it responds in kind militarily, Trump gets an even bigger distraction–both from the impeachment and all the growing concerns about his personal instability coming to the fore in the election season. A major war with Iran will rally support by the American people and push all other issues and Trump policy failures to the background. Trump will therefore undoubtedly resort once more to a major provocation, or even several, before the election.

Iran knows it is Trump’s foreign policy punching bag. It has been since Trump came to office. More blows against Iran are yet to come in this election year.

Iran’s Response: Past and Future

Iran has responded minimally to date. No doubt it will publicize and declare domestically that its missiles did great damage and more is to come to drive the US out of the middle east. But that’s for domestic consumption. Iran’s strategy is to wait out the Trump presidency. And to continue to use its refusal to escalate as evidence to the Europeans that it is the sane party in the US-Iran confrontation.Why? Iran wants Europe to continue to trade with it, to buy its oil. More importantly, it wants Europe to implement what it had suggested with regard to establishing a more independent international payments system.

The current system is called SWIFT, and is controlled by the US and US banks. With SWIFT the US can see who is complying with its sanctions on Iran (or sanctions on any other country). SWIFT is a key institution for US imperialism globally–along with the dollar, the global trading currency, US control of the IMF, dominance of the US central bank, the Federal Reserve, influencing global money flows and interest rates, and so on. Europe and Iran had been discussing setting up an independent international payments system, called INSTEX. The Europeans have been balking, however. Trump has been threatening them with sanctions should they do so. (Or should they install 5G wireless systems by China’s Huawei company. Or should they go forward with new Russian gas pipelines in the Baltic sea. And so on.)

In the 21st century, especially since 2008-09, the USA has been acting increasingly aggressive against allies and adversaries alike as US global economic hegemony begins to weaken. Thus we see tariffs as a more frequent foreign policy tool, economic sanctions imposed by the US increasingly the rule, US actions to destroy adversary economies’ currencies (e.g. Venezuela) as central to US goals of regime change, US direct assistance to indigenous capitalists to overturn democratic governments (Argentina, Brazil, Ecuador, Bolivia), and use of the SWIFT as a means to enforce sanctions and deny dollar access to targeted adversaries.

Should Europe and Iran establish an alternate INSTEX payment system it would mark a major blow to the US global economic empire and hegemony. Such an alternative payments system would likely be joined quickly by Russia, China, and others.

Iran therefore is keeping an eye on a possible agreement with Europe on such an alternative payment system that would enable it to avoid US sanctions. The US would then have no alternative but to blockade Iranian shipments physically. And that would be another act of war by Trump per international law.

Iran had much to lose, in other words, by escalating the conflict militarily with the US. And it didn’t fall for the Trump-Neocon provocation. Not yet. Its minimal response in recent days has made it impossible for Trump to escalate further, in turn, and unleash a greater US military conflict with Iran. Trump may have gained a propaganda victory in the election year with his base, but Trump’s inability to escalate still further means he won’t get his big distraction from his upcoming impeachment trial. Nor will he be able now to bypass the War Powers Act or smother the charge he has already ignored the Act’s limits by unilaterally assassinating a foreign government representative without consulting Congress first.

Iran will continue to avoid an all out war with the US, which Trump’s neocon advisers would prefer to see before the US November 2020 election. Iran leaves the door open to the Europeans. That door would have closed had it, Iran, escalated the conflict.

Trump and the neocons running US foreign policy had to acknowledge today the limits on any further US escalation, given Iran’s minimal response. Had the Trump decided to ratchet up the conflict military in reply to Iran’s minimal response, he would have reaffirmed himself to the world as the aggressor. Political concern about Trump bypassing the War Powers Act would have increased. He would have appeared even more ‘out of control’ to US allies and US voters. Trump has therefore declared a ‘victory’ by assassinating Soleimani and getting away with it. And since it ‘worked’, Trump will no doubt attempt it all again.

If Trump really wanted to renegotiate a new deal with Iran, this would have been an opportunity. He could have declared he was removing some sanctions as a offer to start negotiations. Instead, he ‘doubled down’, as he said, imposing new sanctions on Iran. Trump does not want a new deal with Iran. He never did. Trump has always planned to use Iran and a possible attack on it as his foreign policy punching bag for re-election. So he will keep on ‘punching’ as the 2020 election year progresses.

Every time Iran does not escalate, Trump can declare a partial victory and look tough on foreign policy to his base. And should Iran finally escalate in turn, then Trump has his excuse to intensify his military response.

Trump and his advisers see escalating the confrontation with Iran as a win-win situation. That’s why the provocations will continue. US provocations of Iran will not stop with the Soleimani assassination. They have only just begun.

The year ahead will tell whether Iran has the will to successfully wait out Trump until the US election, or whether US further provocations will result in Iran’s eventually responding more aggressively in kind in turn–i.e. whether Iran takes Trump’s bait and falls into the trap the US has set. This writer’s guess is they will find a way to wait him out, regardless of US efforts to continue to escalate the confrontation.

Provoking Iran is all about the US 2020 election. Trump is in the tradition of a long line of US Presidents (or would be-presidents), facing election or domestic troubles, who choose their own careers over War and the death of others: from Lyndon Johnson (Vietnam), to George H.W. Bush (Panama, 1st Gulf War), Bill Clinton (Bosnia), George W. Bush (Iraq war), and Hillary Clinton (Libya). None of these countries constituted a strategic threat to the USA. But all of them a convenient target to help them advance their political careers.”

Dr. Jack Rasmus
January 8, 2020

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, available at discount on this blog, and on Amazon and other sources as of January 15, 2020. He hosts the Alternative Visions radio show on the progressive radio network. His website is: http://kyklosproductions.com. His twitter handle @drjackrasmus.

posted January 7, 2020
2 Articles on Trump v. Iran: #1: Has the US Crossed the ‘Escalation to War Rubicon’? + 2: ‘Trump’s Deja Vu US Wartime Playbook’

#1: TRUMP’S DEJA VU US WARTIME PLAYBOOK
by Dr. Jack Rasmus, January 6, 2020

History repeats itself, as they say. But in the age of American empire, not just twice. Or even three times. But with disturbing regularity.
The past half century shows two things about how America goes to war:

First, it creates a provocation based on a lie. Second, it then makes its target adversary a ‘demand they can only refuse’, as the final justification for US military action once the adversary rejects the unacceptable offer.

Here’s how it has worked in the past half century–a playbook to war that Trump is now clearly following in the case of Iran with his recent ordered assassination of that country’s general and government diplomat.

As for the initial provocations based on a lie:

1. In 1964 there was the infamous ‘Tonkin Gulf’ incident that provided then president Johnson the cover to escalate US involvement in Vietnam. Later Pentagon documents made public revealed the alleged attacks on US ships off Vietnam by North Vietnamese patrol boats was a total fabrication. 58,000 US and 2 million Vietnamese deaths later, the evidence came out that it was all a hoax.

2. Then there was the 1991 Gulf War. The convenient provocation that turned out to be a lie once again was the Bush administration claim that Iraq was killing babies in incubators in Kuwait. That too turned out to be false, propagated by a family member of the Kuwaiti royal elite who stood before US cameras showing the broken incubators. The US media of course did not properly identify her, instead depicting her as a concerned woman protesting the deaths of premature babies. The US media flooded the American evening news to create final public support for the subsequent US invasion. After the invasion of Kuwait and Iraq forces it was revealed it was all a staged event. Also revealed afterward was how the Bush Sr. administration, through the US ambassador, had told Saddam Hussein, that the US would not intervene if Saddam invaded Kuwait in the first place.

3. In 2001 immediately after 9-11 events in the US the excuse for invading Afghanistan was that the Taliban government in power at the time had assisted Bin Laden in attacking New York and Washington. It later came out the Taliban had nothing to do with planning or launching the attacks of 9-11. And little was said in the weeks, after 9-11 and preceding the US invasion of Afghanistan, that 18 of the 20 or so terrorists who flew the planes into the Twin Towers in New York and the Pentagon were in fact Saudi Arabian Wahhabi sect terrorists aided and supported by the Saudi government. Saudis in the US at the time of 9-11 were quickly flown out of the US by a plane arranged by the George W. Bush administration. Who left on the US aided flight is still publicly unknown to this day. The US ‘unacceptable offer’ to the Taliban was the demand it turn over Bin Laden and all his supporters in Afghanistan–i.e. something impossible without the Taliban provoking its own internal civil war.

4. Then we have the 2003 decision by Bush Jr. invading Iraq. Now the cover lie was that Iraq had weapons of mass destruction, having amassed ‘yellow cake’ uranium material with which to make a nuclear weapon. That too proved totally false after the fact. After the US invasion, nothing remotely representing weapons of mass destruction could be found anywhere despite intense US military efforts to discover such. But in the run-up to war in 2002-03 the lie provided the cover to start the war. And the US demand that Saddam allow US military personnel to roam free anywhere in Iraq–i.e. accept the invasion without resistance–constituted the ‘unacceptable offer’ that the US bet Saddam would reject.

All these lies as bases for provocation represent the standard approach by the US when it wants to go to war. The provocations are then followed by extending an unacceptable ‘offer they cannot accept’ to the targeted adversary. The unacceptable offer is the signal the US has already decided to go to war and is setting up a pretext to justify military action. By refusing the unacceptable offer, the adversary thus gives the US no alternative but to commence the military action.

In the case of the 2nd Gulf War the unacceptable offer was the US demand that US forces be allowed to enter Iraq, roam free unannounced wherever they wanted, and inspect all military bases and other government institutions without interference. In the first Gulf War, it was the similar demand that Saddam pull out all his forces from Kuwait,redeploy far from its borders, and permit US coalition inspectors into Iraq. In Vietnam, it was the Vietcong should disband and both it and North Vietnam should accept a permanent two-state solution, forever dividing North and South Vietnam.

In all cases the US way to war is to make an offer it knows will be refused so that it appears further negotiation or diplomatic efforts are fruitless. Thus only military action is left.

Trump’s Deja Vu Provocation

Trump’s recently ordered assassination of Iran’s senior military leader (who was also a senior Iranian diplomat, Soleimani, is being justified by the Trump administration based on claims that Soleimani and Iran were planning widespread terrorist actions that would have killed scores, if not hundreds, of Americans, if he weren’t assassinated. But no evidence of such a threat is being produced by Trump or his government to date. Evidence of the threat was not even given to members of Congress, after the fact over this past weekend, as Trump post-hoc gave Congress an initial briefing on the action already taken. According to the War Powers Act, and well established precedent, Trump was required to consult Congress before the action, not after. And it has been leaked, though not picked up much by the US press, that that post-hoc briefing was considered seriously insufficient by many members of Congress in attendance.
Evidence lately is leaking out that Trump and his neocon foreign policy radical advisors have been planning the assassination at least since late December, and probably earlier. The Trump administration has been escalating its provocations since at least then. A mercenary US contractor was killed and the US compound in Baghdad was ‘attacked’ by protestors. That in itself was insufficient to launch the assassination provocation. For that, we now have the story of imminent threat to hundreds of Americans that Soleimani and Iran were planning.

In the case of Vietnam there at least was something tangible, in the false photos of the Tonkin Gulf incident. In the first Gulf War they flooded the US media with pictures of broken baby incubators. In 2003 we had then ambassador Colin Powell showing the United Nations his fake placards of installations in Baghdad where ‘yellow cake’ might be stored. Now with Trump all we get is to believe his claim widespread terrorist operations against the US were being planned. Claims from an administration already notorious for its lying, fake news, and fantasy tweets.

What’s Trump’s ‘Unacceptable Demand’?

Events in the days and weeks ahead (surely not months) will reveal what will be Trump’s ‘unacceptable offer’.
Following the assassination, Trump is now clearly waiting on Iran to take some kind of military action against US forces first. The US will use that attack by Iran as an excuse to reciprocate, which is what it apparently has decided to do in the first place back in late December. Since December Trump has been clearly engaged in escalating acts of provocation. The US is betting on Iran falling into the trap–a trap it can hardly avoid given its domestic politics and international commitments.

But in the current domestic US political climate, Trump cannot take military action first. He is prevented by the War Powers Act from doing so. He is also engaged in a domestic political fight over impeachment. A violation of the War Powers Act could potentially add another article of impeachment for violating the War Powers Act law. So he needs to provoke further military action by Iran. That will enable him to actually use the War Powers Act to reciprocate militarily against Iran, and remain still within the War Powers Act. For the Act permits the president to ‘protect US forces’ immediately and later come back to Congress for justification of the action. Trump will launch an attack on Iran should the latter attack US forces, and he’ll then argue his response was protected by the War Powers Act and not a violation of it.

Trump’s latest tweets identifying Iranian targets, including cultural targets, are also designed to threaten and infuriate Iran and get them to attack US forces first. Iran has already indicated it considers the assassination an ‘act of war’. Having said such, for it to do nothing would be politically unacceptable. Iran has publicly declared, however, its targets would be only US military. The likeliest military targets are in Iraq. Once Iran makes the next move, and where, and how, will define what Trump America’s ‘unacceptable offer’ as a prelude to war might well be.

The provocation (assassination of Soleimani) has been made. The US ‘unacceptable demand’ may not be long in coming.

Postscript On the Origins of War in the Period of Late American Empire

The past half century shows that America’s wars are more often than not precipitated by its presidents and their bureaucrat-intellectual advisors. The reasons are some combination of ideology, over-estimation of US power (and under-estimation of adversaries), and decisions by politicians to divert attention from domestic troubles, economic or political, to buttress their political standing or re-elections.

In the case of LBJ in the 1960s, it was clearly ideological in part. LBJ was obsessed with not losing Vietnam on his watch, as Truman ‘lost China’ on his, as he often said. Stop communism and the ‘domino theory’ was widely held by politicians and bureaucrats alike. LBJ was also surrounded by bureaucrat-intellectuals who believed US military power was omnipotent. How could jungle guerrillas in pajamas and sandals dare to resist US military might! Like the Japanese attack on the US in 1941, the thinking was to overwhelm them (guerrillas or USA) with a massive initial force and attack and they’d sue for peace and negotiate. The war would be short. But the USA in 1965 made the same miscalculation as did the militarists in Japan in 1941.

In 1991 the domestic political scene clearly played a role. The US had just experienced a deep financial crisis and a recession in 1990-91. The first Gulf War was a convenient distraction, and a way for then president George Bush Sr. to hopefully boost his re-election bid in 1992–by boosting the economy with war spending and by wearing the mantle of war victor.

In 2003 George W. Bush faced a similar economic and re-election dilemma. The recovery from the 2001 recession was weak. Military spending in Afghanistan was limited. There was no clear military victory. While US forces took over Kabul, the Taliban simply slipped away into the mountains to fight another day. The US economy began to weaken noticeably in 2002 once again. Bush and his neocon advisors had identified and targeted what they called an ‘Axis of Evil’ of countries that were not willing to abide by its rules of American global empire. The countries were: Libya, Iraq, Syria, and North Korea. Except for the latter, they were all easy military targets.

Moreover, little evidence of ‘defeat’ of terrorists post 9-11 called for a necessary military action before the 2004 elections. Invading Iraq in 2003 would also boost the US economy in 2004. Bush Jr. would enter the 2004 race with a military-spending boosted economy and with military victory under his belt. Once again, distraction from domestic problems and/or boosting re-election were the main determinants–along with neocon-ultra conservative ideological rationalization for military action.

Something of a similar scenario exists today with Trump. Despite Trump hyperbole on the economy, deep weaknesses exist and threaten to emerge more full blown in an election year. Trump’s trade wars have produced little economic gain after two years. Domestic politics have left Trump with a pending impeachment hanging over his head, and unknown developments about his personal finances, deals made with foreign powers, and failures to deliver in foreign policy nearly everywhere.

Precipitating a war in his final year in office–should impeachment move forward and the economy move backward–is a card Trump the reckless, high risk taker, convinced of his own personal ego and superiority is very likely to play. He is clearly setting the stage for his big bet: will war with Iran boost his re-election plans and re-energize a weakening economy? Or will it lead to his political demise–as in the case of Johnson or Bush Sr.?

Which road will Trump take? (Which has he already decided to take?). Given the nature of his pre-war provocation in the recent assassination–and Iran’s apparent decision to take Trump’s bait–the odds are great that Trump is ‘rolling the dice’ and willing to engage in a risky military adventure. The ‘unacceptable offer’ when it comes will not be difficult to identify. It appears just a matter of time, and more likely sooner rather than later.

Trump’s imminent military adventure holds little in strategic gain for the USA, and great possible loss globally politically as well. But Trump has always been most concerned with his own personal interests, in this case his political re-election. He will, as he already has, sacrifice US long term interests. Trump is about Trump. And nothing else. Americans will not be made safer but less so. So too the world. And before it’s all over, political instability as we enter the current 2020s decade may well precipitate economic instability on a scale not yet seen.

Dr. Rasmus is author of the just published, January 2020 book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, available on his blog at discount at jackrasmus.com. He hosts the Alternative Visions radio show on the Progressive Radio Network and tweets at @drjackrasmus.

#2: TRUMP v. IRAN: HAS THE US CROSSED THE ‘ESCALATION TO WAR’ RUBICON?
by Dr. Jack Rasmus, January 5, 2020

Wars often occur when ideologues and/or reckless leaders in position of power are willing to engage in high risk brinksmanship in foreign policy military adventures–often as a distraction from their growing domestic problems. Their megolomania often leads them to misread the potential response of their targeted adversary, setting off a process of unavoidable tit for tat escalation by both sides until war actually breaks out.

The historical examples are undeniable of the role of personality in the precipitation of War in the 20th-21st Century:

Germany’s Kaiser 1914 mobilization of allies in response to Serbian archduke’s assassination that set in motion quid pro quo escalations; Hitler’s assumption that Britain-France would do nothing in the case of Poland as they in Czechoslovakia; Japan Tojo’s belief that war with the USA would be short should the US navy’s pacific forces be decimated in Hawaii and driven from Philippines; South Korea president Syngman Rhee’s incursion into North Korea in 1950 that started the Korean war. LBJ’s Tonkin Gulf lie and subsequent military escalation in Vietnam to destroy the Vietcong, based on the assumption that North Vietnam forces would thereafter not join the conflict. Saddam Hussein’s miscalculation to invade Kuwait, based on (false) assurances from the US that the US would not respond. Osama bin Laden’s and Taliban’s assumption US would not mobilize and invade after 9-11. George W. Bush’s embracing of US neocons’ advice that military conquest of Iraq would mean the end of war there, not just the beginning. And now Trump’s provocation of war with Iran by assassinating its most senior military general. Miscalculations all, by reckless, high risk-taking political leaders, with little understanding of the dynamics that often lead up to war.

Three questions to consider in light of the recent US killing of Iran’s top general:

Does anyone doubt what would be the response of the USA if its top general and commander in Europe were assassinated by Iran–and Iran followed it up with a declaration that they did it and he deserved it?

Is it just coincidence that Trump’s ‘crossing the Rubicon latest escalation’ has nothing to do with the timing of impeachment proceedings in Congress? Or what appears to be an increasing probability of US economic recession in an election year.

Trump could not unilaterally go to war with Iran without US Congress approval beforehand, given the US War Powers Act. Were he to do so it would constitute yet another violation of the US Constitution. But he could provoke Iran to start one, attack US military forces, which under that same Act would allow him to respond militarily with as much force as he wanted. Is Trump trying to provoke Iran, in order to have it precipitate an equivalent response so that he, Trump, can bypass a Congressional vote to go to war he knows he won’t get?

Who’s Running the Trump Foreign Policy Show?

Trump has already fired or driven out all the military generals and advisers from his administration who might have cautioned him on his growing military brinksmanship. US foreign policy for months has now been the policy of US neocons now running his administration in State, Defense, and elsewhere. (And recall it was the Neocons back in 2002-03 that advised and drove Bush to attack Iraq).

In all the foregoing historical cases, wars are precipitated by radical ideologue and non-military intellectuals and bureaucrats who advise the high risk taking and brinksmanship action by political leaders willing to ‘roll the dice’ on military adventures. Politicians who are short sighted about the dynamics of how wars are started, and once started aren’t easily stopped (if at all). Politicians and intellectuals-advisers precipitate the conflict; but the conflict soon sets in motion forces of its own that are not controllable. The reckless, high risk politicians are then dragged along by the forces of war, controlled by it instead of controlling it.

Trump is dragging the US toward war, whether by choice (by creating a distraction from domestic troubles); or by advice (by intellectuals-advisers Neocons whose ideologies serve their fantasy imaginations of wielding power and advancing empire); or by the inevitable accident forthcoming once escalation passes a point of no return (as it always does if allowed to continue).

Know Them by the Company They Keep

Trump is now in infamous company: with the Kaiser, Tojo, Hitler, and all the others after who have always miscalculated and pushed their countries to the brink of war–and over.

All reckless, high risk taking, believers in their own egos, and over-estimators of their ability to judge their opponents, the course of events, and their outcomes.

The similarity in personalities–and the errors they typically make that lead to war and destruction–is not easily ignored.
You can know the person by the company they keep! And that goes for Trump, as well.

posted January 1, 2020
Book Review: ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, by Dr. Jack Rasmus, Clarity Press, January 2020

As the New Year begins, and the final year of Trump’s first term commences, readers may be interested in the following review of my just released book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump‘, Clarity Press, 2020, by David Baker.

The book takes a different perspective than most to date on the subject of Neoliberalism. One of its major themes is that Neoliberal policies, which had dominated US economic policy since the late 1970s decade, entered a crisis with the crash of 2008-09 and the weak global recovery that followed. The Obama administration could not fully restore the Neoliberal project in original form, and the material conditions responsible for Obama’s failure to restore Neoliberalism on its original trajectory, it is argued, gave rise to the ascendance of Trump in 2016. Trump should therefore be understood as representing a more aggressive attempt to restore US Neoliberalism, albeit in a new, more virulent ‘neoliberalism 2.0′ form.

After three years of Trump, the book assesses the Trump more aggressive restoration effort, its ’successes’ and where it still has thus far failed to restore. Nearly 100 pages of the book’s analysis addresses the evolution of Trump policies in Neoliberalism’s four major dimensions of Neoliberalism: Industrial Policy, Fiscal Policy, Monetary Policy, and External-Trade-Currency Policy.

The book also critiques most prior accounts of Neoliberalism and their excessive estimation of the role of Ideas in lieu of the role of material forces in its rise, evolution, and now emerging crisis as its internal contradictions have multiplied since 2000. Most accounts to date fail to distinguish the Ideology of Neoliberalism from its actual, historical practice, it is argued.

The book thus places more causation on material factors and forces explaining the rise, evolution, and now emerging crisis of Neoliberal policies in the US. It predicts Trump’s 2.0 restoration will ultimately fail.

The next to last chapter describes the material-technological forces emerging and developing in the US and global capitalist economies that will bring about that failure, now in development and soon to emerge in the 2020s decade full blown.

And in the final chapter, the unstable relationship between Neoliberal economic policy and the US political system is addressed. It is argued that Neoliberalism has always been incompatible with even the limited form of capitalist democracy in the US and the ‘west’. And that incompatibility has been intensifying since 2000 in the US. As it has entered a crisis, it is now becoming more clear that democratic forms, norms, and institutions are now giving way–creating Constitutional Crises in the ‘heartland’ of Neoliberalism (USA and UK)–that will lead to a US political system crisis next decade as well as economic.

The following is David Baker’s early review of the book, which is available at discount on this blog via Paypal, and available on Amazon and other public outlets by mid-January 2020:

Dr. Jack Rasmus
January 1, 2020

The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, by Dr. Jack Rasmus, Clarity Press, January 2020 ; A REVIEW by David Baker, (forthcoming next issue of Z magazine)

At 272 pages, Dr, Jack Rasmus’s new book “The Scourge of Neoliberalism: US Economic Policy From Reagan to Trump” is a big little book. To understand its importance a comparison to another big little book by John Maynard Keynes entitled The Economic Consequences of the Peace, “Economic Consequences” is helpful.

Economic Consequences grew out of Keynes’s participation in the post-World War I peace negotiation as an English representative. When Keynes discovered the extraordinary punitive nature of the peace being imposed upon Germany he walked out in protest. His book explains why.

Economic Consequences begins with a careful, common sense explanation as to how the economies of Germany France and England had become interlocked and interdependent which we would now describe as a global economy in the making. So to punish one, in this case Germany, was to punish all. Likewise, the punitive economic sanctions imposed upon Germany were so severe that Keynes predicted that a political monster would arise in Germany. That political monster was ultimately embodied in the person of Adolf Hitler.

Although our present political monsters, Trump and the Republican Party, have not reached the level of Hitler, it was not a rhetorical flourish when Noam Chomsky called them worse than ISIS. The Scourge describes how our home-going grown political monsters came into being.

Rasmus excels at economic history. His brief account of American economic history since 1900 rings true. His baseline is that economic structures are not static but constantly changing to control an evolving economy as well as political changes.

He divides the American economy since 1900 into three periods; roughly Pre World War I, during and after World War II, and the Reagan era which kicked off neoliberalism. In the two World War eras, America faced a happy challenge: how to manage America’s growing economic might so it would become an unsurpassed superpower. The first restructuring, the Pre WWI restructuring was to make the US capitalists a co equal partner with Britain and European capital; the second, during and immediately after WWII, was to make the US a global economic superpower. The third era, was and is, an unhappy time for America’s policymakers because they are and were faced with real challenges and real decline; the goal was to defeat domestic challengers, such as unions, as well as global challengers, such as Japan and Germany, for decades to come.

The stage was set for the third era in the early 1970s. Unions were extremely powerful and had made unprecedented wage gains of up to 25% in the early as 1970’s . Meanwhile America could not compete with Japan and Europe due to its lagging and aging industrial infrastructure. So the policymakers faced a real dilemma: what to do? Their choice came to be called neoliberalism which is neither new or liberal but a marketing term exploited by an all too compliant intellectual class.

Neoliberalism is essentially a set of crude policies that maintains high short-term profits at the expense of long-term profits and prosperity for all. The policymakers did not want to plunge say 35% of GDP into research and development and infrastructure upgrades because that would cut into their profits. Instead they took the easy way out: they cut taxes for businesses and the wealthy; they destroyed unions; the offshored US manufacturing to low-wage countries; they repealed decades of important regulations; they destroyed real pension plans for the lower 90%; robbed Social Security; they onshored cheap high-tech help from foreign country; they unleashed rivers of capital across the globe; they let the banks gamble with esoteric financial instruments; they destroyed public education and crippled the young with more than $1.5 trillion in student loans; they poured at least $5 trillion of virtually free money into the banks and investors from the Fed and on and on and on.

The Democratic Party’s response to all this was appalling: one campaign promise after another was broken and the lower 90% were faced with an active enabler of neoliberal policies—— Bill Clinton—– or a passive enabler of neoliberal policies, Barack Obama.

Rasmus also excels at the economic consequences of these policies: stagnating incomes and standard of living for the lower 90%; grotesque income inequality; a rotting infrastructure; lack of access by the lower 90% to adequate housing, healthcare, transportation and education. America has become a second rate country with an angry precariat.

Rasmus is also gifted at demonstrating how this intricate web of policies create negative feedback systems and leads us into an economic and political dead end. Two important issues may help demonstrate how this is occurring. His discussion of war/defense spending is illuminating. At no time since 1900 was any country a military threat to the United States. That ended in 1812. And yet, beginning with Reagan and continuing through Obama/Trump war/defense spending has gone through the roof. Why? A variety of reasons.

First, war/defense spending is an easy money conduit for the Fortune 500 since by definition there is no foreign competition. Likewise, it is a major way of funding research and development without calling it that: who would be willing to pour tens of billions of tax dollars into IT to make, say, Bill Gates rich? So we label it defense spending. But third and finally there was a tacit acknowledgment that since America could not compete economically then it would continue to compete militarily. Rasmus excels at demonstrating how this is a complete policy dead-end.

This war/defense policy created the dilemma of double deficits. That is, how can America cut taxes and increase war/defense spending? Answer: the double deficit. The US agreed to allow its allies to import significantly more to the US than the US was exporting to them but to fund this chronic and growing trade deficit the allies agreed to buy by large quantities of US debt to close the gap in deficit spending. Likewise taxes for businesses and wealthy investors have been cut by $15 Trillion since 2001 which also pushed the domestic deficit through the roof. But this rising debt generated huge interest payments, which the Congressional Budget Office estimates in ten years will be about $1 trillion in interest payments alone per year. Meanwhile the lack of real research and development investment by the US led to low productivity growth which in turn led to the further compression of wages/income for the lower 90%. The US economy has become a zero-sum game where the gains of the upper percentiles are taken from the lower 90% and is part of the reason we have the grotesque inequality of income and wealth we have.

Then finally there is what I call the China Challenge which demonstrates the dead end of this policy choice. Several years ago, China announced its 2025 policy plan which would put China in the lead of new IT development such as G5, cybersecurity and artificial intelligence. This is a real and significant threat to military leadership by the US because new IT developments have obvious and long-term military applications. This in turn prompted Trump’s trade war with China that ultimately collapsed.

As trade war talk intensified, the purchase of American debt by Asian countries slowed; equally important the Chinese stopped buying American agricultural products which was one of the core political constituencies of Trump: Midwest farmers, large and small, many of whom went bankrupt, started screaming at the Trump administration to back off from China. So Trump backed off despite his public announcements that he had won the trade war. The Chinese will steam ahead to become the world leader in IT while the US falls farther and farther behind which critically impairs even its grotesque military supremacy.

The Chinese Challenge is just one example of how Rasmus demonstrates the long-term failure of neoliberal policy. Another important policy dead end is the Greenspan “put”. The Greenspan put is to maintain low interest rates through the Federal Reserve. Those low interest rates allows multinationals to achieve high profits on their foreign manufacture subsidiaries. How? Low rates keep the value of the US dollar low and therefore the exchange rate value of the foreign currency of multinationals in the country of their operation high. This in turn allows the multinationals to “buy” more dollars and thus return more profits in US dollars to their main offices. It also allows US exporters to other countries to sell more, raise profits, and beat out competitors. But the low interest rate also allows financial institutions to gamble in financial instruments which has prompted one asset spike after another and the inevitable collapse of the same, such as Dot.com bust, the savings-and-loan collapse, the subprime meltdown. Each collapse becomes more severe than the prior but the regulated banks and the unregulated banks—-shadow banks—— continue to speculate in financial assets because of the billions of dollars in immediate profits.

Likewise, the low interest rates benefits major businesses by allowing stock buy backs, dividend payouts, mergers and acquisitions and offshoring of jobs. Little if anything goes into the real economy in the US to improve productivity and create full time jobs for Americans.

This makes financial markets more more unstable and requires the Federal Reserve to pump more and more money into the system——– trillions of dollars which should have gone into real jobs in the real economy in the US. Instead, they went into stock buybacks, mergers and acquisitions, dividend payouts, off shoring of manufacturing units, and the hoarding of hundreds of billions of dollars offshore by major multinationals. Apple alone is hoarding over $250 billion in various countries outside of the US.

And then the problem becomes that even a modest spike in interest rates causes a collapse in assets such as 35% decline in the stock market in 2018 which prompted a fight between the Fed and Trump which Trump “won” so the Fed lowered rates which only means the next collapse will be more severe than the last one as the scared bankers well understood who protested against Trump’s non negotiable demand to lower interest rates.

Rasmus has a wonderful way of describing the natural and structural changes that are coming to the economy. The key driver is energy production which has moved from water, to coal, to gas and oil, and is now moving toward solar and hydrogen production. At each stage of this transformation of energy production, the economy has to be retooled and refitted to meet the challenges of the transformation in question. This in turn stretches many businesses to the breaking point, i.e. bankruptcy.

The energy component is changing at the same time that IT development is pushing economic structures into a whole new dimension through artificial intelligence, cybersecurity, G5 Communications Systems, and biotechnology. The problem is that neoliberalism has no answer to these significant problems and has no means of dealing with for example what I’ve called the China Challenge. Bloated with debt the major multinationals cannot and will not make the necessary investments required to meet the challenges of these new developments and remain competitive. It is a bizarre situation where one of the most undemocratic countries in the world is leaping ahead of us toward the new challenges that we are facing while the US becomes a second and perhaps even third rate country.

But Rasmus pushes the future even farther and describes how our political institutions are becoming more and more distorted and less and less democratic. The means of making America oligarchic is through a multitude of devices such as the electoral college, the US Supreme Court, gerrymandering, voter suppression, and the rivers upon rivers of money that flow from the 1% throughout our political institutions utterly corrupting them.
Even a great book has flaws. Missing from The Scourge is a discussion of how the war on drugs originally launched by Reagan which continues to this day is a potent weapon of neoliberalism to permanently disenfranchise tens of millions of poor people of color from any meaningful participation in US society by labeling them felons. The obvious economic and political use of the drug wars is to criminalize a potentially political disruptive segment of our society and make sure that the US has no obligation to help them with decent jobs, housing, education or healthcare. See The New Jim Crow.

The New Jim Crow brings up a related issue re Neo Liberalism: over determination of policies, that is a policy has multiple uses. As with the drug wars, students loans now at $1.5 trillion have the same result of disabling a large potentially politically disruptive element of society that the “drug wars” have: student loans disable the young from political activism, forcing them to spend much of their adult lives just managing debt. Likewise, as David Stockman observed the unrelenting march toward the ocean of debt called the deficit is a weapon to destroy socially important programs such as social security and Medicare.

Rasmus’s relentless drumbeat that the future only holds endless job losses to automation is true but there is a deeper issue. Automation, artificial intelligence and other IT developments, could free up critical and needed human resources to meet the challenges of the future. Think about climate change. Think about the tens of millions of jobs that could be created that are not only necessary but fundamental to avoid the coming environmental collapse. Every building and every parking lot in the United States should have solar panels on them; all of the hundreds of oil refineries must be dismantled; all of the tens of thousands of miles of gas and oil lines must be removed. Please see Bill McKibben’s description of this job creation which he has called World War III to emphasize the huge job creation and necessary fiscal injections on the level of WWII which soared from 35% to 70% of GDP.

Rasmus is a powerful advocate for Medicare for all but should also consider that this also would demand huge human resources—-the training of thousands of healthcare workers in the US. Healthcare workers, like IT workers, are on shored by the thousands. We must train our own to take on the difficult task of caring for all throughout the country and not just in wealthy areas along the coasts. The lack of access to quality health care by the rural poor is criminal; it is not a “mistake” that many of Trump’s most ardent supporters are the rural poor.

Finally, I wish Rasmus would provide a glossary. Such terms as median versus average income and negative interest rates, continuously escape me despite the fact that I’ve read about them in context at least 10 times.
The Scourge a powerful, important book. We ignore it at our peril. The utter daily degradation which results in the stunted lives of hundreds of millions of Americans is at stake, who now lash out at each other about such nonsense as race and gender while Trump and his kind laugh and the world spins out of control into environmental hell. In many of his other writings Rasmus has given a clear road map out of the dead end of Neo-Liberalism; at the risk of repetition it would help to have that map articulated again.

David Baker
December 2019

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