posted November 2, 2013
The Slowing Global Economy: Contradictions of Fiscal-Monetary Policies

In 2008-09 the global capitalist economy crashed with a bang—a collapse from which it is still struggling to fully recover. The next crisis may come, however, not in the form of a crash but as a slow, grinding economic stagnation that continues on for years or even decades.

The scenario of global stagnation is the direct consequence of the convergence of Monetary and Fiscal policies among Capitalist policy makers worldwide that are not only becoming increasingly ineffective in generating sustained economic recovery, but are becoming increasingly counterproductive—and thus contradictory—to achieving a sustained economic recovery.

Both the US and global economy today are experiencing a long term economic slowdown. That slowdown has been uneven, both between and within the major sectors of the US and global economies.

The periodic appearance of brief and historically weak, short term recoveries in one or more of the four major sectors of the global economy (Europe, North America, Japan, China and Emerging Markets), do not negate what is an otherwise clear, general longer term trend toward slower global growth, and a weakening of global economic recovery from the worldwide financial crash and deep recession of 2008-09.

China & Emerging Market Economies

Following the worldwide banking crisis of 2008-09, the Chinese and emerging markets’ economies recovered rapidly as a consequence of China’s significant 15% of GDP fiscal stimulus of 2009, more than half of which was government direct investment in infrastructure and construction, and the accompanying massive capital in-flows after 2009 from the advanced economies (US, Europe, Japan) into emerging markets in Asia and Latin America.

China’s initial 15% of GDP fiscal stimulus in 2009, and its subsequent rapid and full recovery, served to dampen the 2008-10 global economic contraction elsewhere; however China and its 15% stimulus was not sufficient to generate sustaining global economic recovery after 2009. While clearly ‘coupled’ with the global economy, China’s economy was not, and still is not, sufficiently large to drive the global economy.

Since 2011, moreover, the significant 2010 recovery by China and emerging markets—both highly dependent on manufacturing and exports to North America and Europe—has begun to noticeably weaken.

In the case of China, its prior 13.7% GDP growth rate in 2007 before the crash fell to 7.5% in 2009. After its 15% GDP fiscal stimulus, it rose to 10% in 2010. Since then it has steadily declined, however, to 7.5% most recently, as demand for China exports by the US and Europe have fallen as the US-Europe recoveries have faltered since 2010. While China GDP has declined to 7.5% most recently, according to official government sources, according to independent sources that question the accuracy of China official data, China’s GDP may have declined to as low as 6%-6.5%. At even the official 7.5% rate, China’s economy is back to the low point it reached in 2008-09 as a result of the global economic crash—which is less than two-thirds the growth it was experiencing before the global crash.

The massive capital in-flows from the US-Europe-Japan to emerging markets flowed into China as well post-2009. Those inflows contributed significantly to an over-stimulation of China’s residential housing and local construction markets in its major cities. That began to produce a housing ‘bubble’ in major cities in China, after 2010 that still remains a significant problem today. To slow the bubble, in 2012-2013 China policy makers took steps to quell the runaway housing prices and bubble. But those steps also significantly slowed the general economy in 2013—adding to China’s recent 2012-2013 GDP slowdown.

China’s response to slowing exports to the west after 2009, its aborted attempt to control its housing bubble this past year, and the current economic slowdown was to introduce another, albeit weaker fiscal stimulus this past summer 2013. That Stimulus II aimed at accelerating government spending on fast rail and other infrastructure projects once more and on measures to boost exports. China’s economy most recently appears to have therefore stabilized, but only at somewhere between a 6.5%-7.5% GDP growth rate. As it has slowed, China consequently is contributing even less to the global economic recovery than before—resulting in the noted slower long term global economic growth.

Unlike China, other emerging markets have been even less successful maintaining their immediate post-2008 economic growth and are now clearly slowing rapidly. More dependent than China on massive foreign capital in-flows from Europe, Asia and Japan, emerging markets economies like Brazil, India, Indonesia, Mexico, Turkey, etc., are now in 2013 experiencing a sharp slowing of their GDP growth rates, approaching zero and stagnation in some cases. Their rapid slowing is a direct consequence of the major shift in monetary policies by central banks in the US, Europe and Japan in 2013 and the sharp reversal of capital flows back to US, Europe and Japan. The rapid slowing of economies like India and Indonesia and virtually stagnant growth in economies like Brazil, Mexico and others have contributed even further to the slowing global economy.

For China and emerging markets then, the picture is one of clearly slowing long term growth. No longer a critical source of dampening the general global slowdown, China and key Emerging Markets are now contributing in part to that slowing trend–notwithstanding some evidence of re-stimulating the economy in China in recent months that will likely prove a short term aberration in an otherwise longer term trend.

Europe, the U.K, and Eurozone Economy

A second major sector of the global economy—i.e. Europe and its 17 nation core, the Eurozone—has fared much worse than China-Emerging Markets.

The 17 economy Eurozone has experienced double dip recessions since 2008, as have the UK and a number of other EU economies. Meanwhile, the southern periphery of the Eurozone from Portugal to Greece has been mired in what can only be described as a classic, bona fide economic depression.

As the following graph illustrates, the Euro Area economies declined sharply in 2008-09, experienced a short and shallow recovery of 1.2%-1.7% in 2010-2011, then fell into a double dip recession for the next 18 months during 2012 through the first half of 2013—experiencing what this writer elsewhere has described as a classic ‘epic’ recession characterized by a financial and economic crash, followed by brief periods of short and shallow recoveries, followed in turn by a further brief contraction, and continuing thereafter in a similar repeat pattern.

The Euro economy only just recently, in the last quarter, experienced a tepid 0.3% GDP return to growth. That recovery will likely prove even shorter than the prior 2010-2011 recovery, leading to yet another short downturn and a continuation of the ‘stop-go’ recoveries characteristic of ‘epic’ recessions today.

The Euro one-quarter latest recovery is the consequence of the capital flows now returning from emerging markets; the temporary stabilization of its banking system by the European Central Bank and Bank of England; a temporary respite for its sovereign debt crises as global speculators have for the moment moved away from destabilizing government bond markets in Spain, Italy, Portugal and elsewhere to more profitable speculative pastures in Asia; and as some economies, like the UK, have shifted to artificially stimulating economic growth by pumping up their housing sectors once again. But all this has produced is a return to the historically sub-par growth rates of 2010-2011. The fundamental problems of the Euro sector economy have in no way been resolved. Real investment is stagnant or declining, unemployment remains high at record levels, consumers aren’t spending, banks aren’t lending, the banking system remains highly fragile, and government sovereign debt continues to rise.

Stagnating at best, the Euro sector economy is adding virtually nothing to global economic growth. And at any moment it may quickly once again become a major contributor to the slowing long term global growth trend.

Japan’s Economy

Locus of the first ‘epic’ recession in modern economic history that commenced in 1991-92, the Japanese economy has experienced multiple recessions in the intervening two decades. It is the most classic case of ‘stop-go’ recoveries. As in the USA and Europe in 2008-09, Japan experienced a major financial crash in the early 1990s that was the result of runaway financial speculation. That financial crash led to a real economic contraction. Japan then bailed out its banks (with assistance from the US and Europe), but did not stimulate its domestic economy appropriately to ensure a sustained economic recovery. Japan’s capitalists and policy makers in government assumed that, once banks were bailed out, if they just waited, the ‘markets’ would eventually fuel the recovery for the rest of the economy. Banks would lend, businesses would invest domestically, incomes would rise again, and consumption return. They waited. And did so for 20 years. As a similar strategy would prove for the US and Europe in 2008 and after, a monetary policy aimed at bailing out banks first did not necessarily result in banks lending to stimulate investment—at least in the Japan domestic economy. Banks lent, but offshore or into financial markets worldwide. Large Japanese multinational corporations—the top layer of Japanese businesses that received loans—also invested abroad. Incomes and consumptions for the general populace stagnated, as did consumption, and therefore economic recovery.

Since the 2008 general global financial and economic crash, Japan has experienced a ‘triple dip’ recession. As in the case of Europe, the initial 2008-09 contraction was followed by a shorter (than Europe) and shallow 18 month recovery in 2009-10, by another short recession in 2011, another even briefer recovery of 9 months in 2011-12, and yet another shallow recovery in 2013.

Comparing the Euro and Japan Economies

While both the Euro sector and Japan sector economies have experienced ‘multiple dip’ recessions since the global crash in 2008, their respective policy responses to the 2008 crash are worth noting.

In the case of the Euro sector, the response was to implement a fiscal policy that has been called ‘Austerity’. That policy means withdrawing fiscal stimulus from the economy (government spending and tax hikes) while undertaking a nominal stimulus in terms of monetary policy by lowering interest rates. But the latter monetary policy proved insufficient to stabilize the banking system in Europe, while Austerity (i.e. less spending, higher taxes on consumer households, and ‘privatization’ or selling off of public property and investments) actually made the real economy even worse.

Up until most recently, the Euro sector has been the weakest link in the global economy and the greatest relative contributor to the long term global economic slowdown. The 17-nation core ‘Eurozone’ economy within it has had no actual central bank. It has not been able to ‘bail out’ trouble banks as easily as has the US or Japan (or the UK) which do have central banks. The Eurozone’s partial equivalent of a central bank, the misnamed European Central Bank, ECB, has heretofore had to get its 17 countries’ governments to put up bail out money, which has then been funneled through the weakest governments (Spain, Italy, Greece, Portugal, etc.) to, in turn, bail out their banks. This has not worked very well. Starting in 2012 the ECB then temporarily stabilized the banks by promising to support them when in trouble, as if it, the ECB, were a real central bank (which it isn’t). This has temporarily bought time for the Eurozone’s banking system that remains the most fragile in the global economy still. In the interim, the ECB has lowered interest rates to 0.5%. On the fiscal side, the Eurozone is even less able to stimulate the 17 respective member economies. It has no ‘fiscal union’ whatsoever. Thus wealthier countries, like Germany, can and have undertaken fiscal (tax and spending) stimulus to stabilize their economies, whereas weaker economies in the southern periphery have been unable to do so—and in fact have had to cut spending (austerity) in order to repay the loans given to them with which to bail out their banks. Austerity in Europe is thus the direct consequence of an inefficient and ineffective approach to bailing out the banks. And so long as the banks are not stabilized, austerity will continue. And so will the stop-go Eurozone recovery.

The case of the UK is somewhat different. It has a central bank, the Bank of England, that first thing bailed out the UK banks. Also like the US, the UK embarked upon a monetary policy regime of reducing interest rates to near zero and, as well, introducing a policy called ‘quantitative easing’, or QE, invented by the US central bank, the Federal Reserve, in late 2008. With QE, the central bank in essence prints money (i.e. not funds raised by taxes or deficit spending by the government), and then uses that printed money to purchase bonds from private investors and bankers—often paying the latter more than the bonds are worth at current market value. That liquidity (money) injection serves to bail out the banks and investors with very low cost (rates) and direct purchases by the central bank. Now flush with cash once again, bankers and investors can lend once more. Theoretically, this is supposed to result in a return of real investment that creates jobs, raises incomes, and generates consumption. However, as noted previously, it does none of the above. Rather it results in cash hoarding by the banks, lending to multinational corporations that invest in emerging markets and China, or in investing by bankers and now flush-with-cash again investors in financial securities markets worldwide.

QE and low near zero interest rates for bankers do result in bailing out the banks. But it doesn’t result necessarily in stimulating the real domestic economy. It mostly provides liquidity that flows offshore—up until 2013 to emerging markets, China, and to liquid financial securities markets across the globe (e.g. derivatives, foreign exchange, emerging markets funds, local real estate (China) property, sovereign Euro periphery bonds, stock markets, junk bond funds, hedge funds, private equity, etc.).

Monetary policy in the form of virtually free money (zero or near zero interest loans from the central bank to bankers) and QE (subsidized purchases of bondholders’ market worthless bonds at above market prices by the central bank) was first introduced as the primary policy response to the 2008 crash by the US and UK central banks in 2009.

This US-UK monetary policy was accompanied by a token fiscal policy that emerged as well at first in 2009 in both the UK and US. That token fiscal policy was quickly and abruptly replaced in the UK by its reverse—an ‘austerity’ fiscal policy—as soon as the conservative government displaced the labor government there. (In the US, as will be described shortly, the replacement of a token initial fiscal stimulus in 2009, by ‘Austerity American Style’ after 2010, would occur less abruptly and in stages).

The UK’s abrupt withdrawal of a fiscal stimulus and its replacement with austerity fiscal policy tripped the UK economy into a double dip recession almost immediately. In order to avoid a triple dip in 2013, in recent months the conservative government partially reversed its austerity policy and re-stimulated the UK economy, producing another weak, shallow recovery. That recovery has been based, however, on an artificial re-stimulating of the housing sector, benefiting primarily banks and investors. Housing prices in the UK, in particular in the London area, have are now approaching a ‘bubble’ once again, as they had before the 2008 crash. Simultaneously, the UK conservatives have continued their policies of austerity elsewhere, by reducing spending on education, dismantling the national health care service, as well as reducing spending on other social programs and public investments.

Japan Adopts US Policy ‘Playbook’

In contrast to the Eurozone, and like the US, Japan has recently embarked its own massive QE policy and injecting more than $1.4 trillion into its economy. Simultaneously, it plans to cut business taxes while raising taxes on consumption and households. Copying US Federal Reserve policies since 2009, Japan’s central bank, the Bank of Japan (BoJ) launched early in 2013 a QE program designed to purchase $68 billion a month in banker-investors’ bonds, with plans to inject more than $1.4 trillion in total liquidity into the economy by 2015. Given the relative size of Japan’s GDP, that liquidity injection is even greater than the USA’s recent QE3 of $85 billion a month.

Also like the US, Japan announced a fiscal policy further reminiscent of the US in 2009. It plans to increase government spending by $128 billion—which represents less than 3% of its GDP. At the same time, it announced plans to cut business and investor taxes while doubling sales taxes on consumers and households from current 5% to 10%. Yet to be announced are further proposals to reduce labor costs, environmental costs, and other business costs, and to increase defense spending.

In other words, it is the US Fed monetary policy of massive QE and liquidity for bankers and investors, plus a token fiscal stimulus, combined with the beginnings of an austerity fiscal policy at the same time—i.e. very much like the US policy mix since 2008 and similar in ways to the UK’s as well.

Since the announcement of the new policies, called ‘Abenomics’ after the name of its new prime minister, Abe, the Japanese stock markets have surged, initially by nearly 80% . Corporate profits are estimated to rise by 46% in 2013. The Japanese Yen has fallen 20% to the dollar and other currencies, boosting Japan’s exports at the expense of its neighbors.

On the negative side, however, an early boost to Japan’s GDP in the first quarter of 2013 is already declining in the second. Business capital spending, strongly negative in the first half of the year, has barely risen. And consumer spending still remains nearly flat. This past summer 2013 both exports and industrial production turned negative once again, and both inflation and interest rates have begun to rise, eventually causing a further slowing of consumption. The rise in the sales tax is estimated to result in a 0.5% drop in Japan GDP for every 1% rise in the tax, which is projected to increase initially by 3% (8% total) and to 10% by 2015. Given these outcomes, the consensus among economists is that Japan’s economy will still not grow more than 1.28% annually over the coming decade even as profits and stock markets surge and create further income growth (and inequality) for corporations and wealthy Japanese households.
In short, although less than a year old, it is already becoming evident that Japan’s QE + token fiscal stimulus and incremental austerity policy will be capable—as it has in the US and Euro Area–in only generating a stop-go economic recovery while exacerbating income inequality trends.

The US Economy

It is now more than four years after the US and global recession was officially declared ended in June 2009. Since 2009 the US central bank, the Federal Reserve (Fed), has pumped nearly $4 trillion in QE printed money into the US and global economy.

When other Fed measures are added to QE, the total liquidity injected by the US central bank amounts, conservatively, to between $10 and $20 trillion. Add liquidity injections by the Bank of England, European Central Bank, and Bank of Japan that have replicated the Fed’s QE and massive liquidity injections to bankers and investors, the total exceeds well over $20 trillion.

The US Fed’s monetary stimulus, QE and trillions of dollars more of liquidity injections to banks and investors, had—like all QEs globally—little impact on real economic growth. Bankers and investors took the free money and subsidized purchases of their bad bonds and either hoarded the cash, deposited it back with the Fed to earn interest, loaned it to multinational and other large corporations (not smaller businesses) that invested offshore in emerging markets or used it to pay dividends to stockholders, or invested it in financial securities markets in the US (stocks, bonds, derivatives, etc.) or around the world. In fact, much of the Fed injections have ended up offshore, not in the US. In none of these cases does QE result in domestic real investment that creates jobs, income, household consumption, and consequently sustained economic recovery.

What QE and free money does create is excess demand for stocks, junk bonds, foreign exchange, and other financial securities. There is almost a perfect correlation between the start and conclusion of QE programs in the US and the stock market’s booms and busts since 2008, as the following graphic illustrates.

By stimulating stock and other financial securities values, QE results in a massive increase in incomes of investors and their institutions (corporations, hedge funds, private equity, etc.). Conversely, by having little if any impact on real investment, and therefore jobs, QEs depress relative income growth for wage earners.

In a study released in recent weeks by Emmanuel Saez, professor economics at University of California, Berkeley, who has been compiling IRS data on income inequality in the US (and globally) since 2002, shows that the wealthiest 1% in the US—i.e. those who benefit most from investment in stocks, bonds, and other securities—garnered no less than 95% of all the income gains since 2009. That compares with the same group accruing 65% of all income gains between 2001-2008. So the rich get richer as the economy does poorer. But it’s not just the economy’s real performance that matters. It’s the free money provided by the central bank to bankers and investors that results in their accelerating income share. It’s free money that they then invest offshore or in financial securities instead of in real investment in the US that creates jobs. While their income rises, the incomes of wage earners stagnates and declines. A major characteristic of the US economy since 2008 has been a steady decline in real disposable incomes for the majority, as the following graph illustrates:

Another direct consequence of QE and Fed monetary policies since 2008 has been the decline in real US investment that would otherwise create jobs, even as profits continue to rise to record levels. This decline in job creating investment amidst rising profits occurs because of a massive shift toward investing in financial securities, enabled and encouraged by the free money policies. This shift has been especially pronounced in the US and UK, and significant as well in Japan and the Eurozone as well. A recent study by Gerald Friedman shows this clearly in the following graph.

With corporate taxes as a percent of profits at 12.5%–compared to 24% on average between 1989-2008—the excess profits are distributed to shareholder investors in the form of dividends and capital gains. With personal income taxes also at record lows for the wealthiest households, that profits distribution is mostly retained by wealthy households and investors. Income inequality accelerates.
On the fiscal side, at least $2 trillion more in stimulus package business tax cuts and government spending were pumped into the US economy between 2008-2011. After November 2010, even that fiscal stimulus was withdrawn. 2011 marks the beginning of ‘Austerity American Style’—an incremental reduction of fiscal stimulus in the form of a succession of agreements to cut deficits and extend debt ceiling limits negotiated between Obama and Congressional Republicans.

After some token reductions in the spring of 2011, a major reduction of $1 trillion in government spending levels occurred in August 2011 as part of the ‘debt ceiling deal 1.0’. Another $1.2 trillion withdrawal commenced with the passage of the ‘sequestered’ spending cuts beginning March 2013. As this article is being written, additional spending cuts are being determined as part of the October 2013 ‘debt ceiling 2.0/2014 budget deal between Obama and Congress. An incremental approach to austerity is the characteristic of US-like ‘austerity programs’. In the Eurozone the austerity measures were introduced from the very beginning, and have been especially severe in the southern and eastern European periphery economies. In the UK, austerity was introduced in a particularly draconian fashion, with the takeover of the UK government by conservatives in recent years. In Japan, it appears some variation of the US-UK experience will eventually emerge.

But just as QE and monetary policy has not stimulated recovery of the real economy, real investment, jobs and incomes—so too has fiscal policy proved to be a temporary and insufficient stimulus at first, followed by a negative influence shortly after in the best of cases.
The result of the combined trillions in U.S. monetary and fiscal stimulus over the last 4.5 years of so-called ‘recovery’ has been an economic growth rate of less than half that occurring during prior recoveries from recessions in the U.S. Since the official end of the US recession in June 2009, the cumulative GDP growth for the US has been a meager 8.2%–compared to an average for all prior 10 US recessions of 15-17% cumulative GDP growth after 4-5 years.

What the red-line in the above graph shows is that US growth, sub-par cumulatively, has begun to level off and slow longer term as well.
Following a brief, below-average initial recovery in late 2009, the US economy 2010-2012 experienced what might be called a series of ‘economic relapses’, wherein its economic growth rate, after a brief shallow growth period, slowed significantly. Relapses (a marked slowing of economic growth rates) happened in the late summer of 2010 and again in early 2011. GDP defined growth actually turned negative in early 2011. Ample evidence suggests the US economic growth fell to zero or less a third time in late 2012.

In the most recent 12 months, July 2012-July 2013, US economic growth has been at an historic sub-par 1.8% in GDP terms. Recent forecasts for the coming 12 months by independent sources, like the International Monetary Fund, predict more of the same, with a GDP growth of only 1.7%.

And if one were to adjust nominal GDP growth between 2010-2012 for inflation using the CPI consumer price index, instead of the much more conservative GDP deflator price index, the US economy would have experienced not only a bona fide ‘double dip’ recession but an actual ‘triple dip’.

As this writer has also written elsewhere the past 18 months, as the US economic recovery becomes increasingly fragile and the long run slowing growth trend continues, it becomes increasingly susceptible to experiencing a bona fide double dip recession as defined by GDP and other economic indicators. One or more of three things would have to happen, in order to precipitate a definitive double dip recession in the US. The first is a continuation of deficit cutting in the US budget. The second a steady rise in interest rates. And the third a second banking crisis, most likely originating in Europe or even Asia. While the possibility of the third appears to have diminished somewhat in recent months, the potential for the first two appear to be rising.

The Contradictions of Global Fiscal-Monetary Policy

QEs, massive liquidity injections by central banks, token fiscal stimulus policies followed soon by austerity fiscal stimulus withdrawals represent the recovery policy ‘mix’ for the US since 2008. In similar form, albeit with different emphases, the same monetary and fiscal policies have been adopted by other main capitalist sectors of the global economy. Those economies, from the Eurozone, UK, to Japan and elsewhere are also experiencing a ‘stop-go’ economic recovery trajectory. The outcome has been more or less the same everywhere: a bailing out of the banks, an acceleration of investors income and corporate profits, a shift toward speculative financial investment, growing income inequality, declining relative real investment, inability to generate full time employment and wages, declining real disposable incomes for median family households, stalling consumption, and a sub-par historical, ‘stop-go’ economic recovery.

The US driven policy package of QE-unlimited liquidity, plus token fiscal stimulus followed by austerity and initial stimulus withdrawal, has been converging across all the capitalist economic sectors globally. All sectors, with perhaps the exception of China, have been following the US fiscal-monetary policy lead. This has been especially so with regard to QE and monetary policy which has been the main policy level of choice for capitalist economies and governments worldwide since 2008.

But fiscal-monetary policies globally are not only failing to generate a normal, sustained economic recovery; they are now also beginning to have a contradictory, counter-productive economic impact.

The growing contradictions in monetary policy are several.

First, it is clear that after five years of QE, investors are becoming addicted to QE and virtually interest free money from the Fed and central banks. When the Fed attempted to signal a future withdrawal from QE this past June, financial markets reacted severely. In a matter of weeks, stocks, bonds and financial asset prices plummeted and interest rates rose quickly. The Fed then backed off, re-signaled again in August, with the same response. It may prove significantly difficult for the Fed, and other central banks, to begin suspending QE and withdrawing liquidity without interest rates rising rapidly and provoking a serious real economic contraction. At the same time, continuing liquidity and low rates has a decreasing positive effect on the real economy.

Second, it appears the capitalist economies are becoming increasingly interest rate increase sensitive as they have become interest rate decrease insensitive.

Third, the continuation of massive liquidity injections via QE and other means has begun to exacerbate currency wars. One sector engages in QE, driving down its currency’s value, lowering in turn the cost of its exports at the expense of competitors. Others then respond similarly. Currency volatility results across the board, which creates uncertainty for real investment. Economies subsequently slow. What was competitive devaluations during the great depression of the 1930s via declaration, now occurs via currency exchange rate movements via QE and liquidity.

Efforts by the Fed and other central banks to withdraw from QE result in massive capital flight from emerging markets, as hot money that was pushed into those markets when QE was growing now sloshes back to the US and Europe when liquidity is reversed. Capital flight from emerging markets forces those economies to raise interest rates to lure back the capital, but doing so slows their real economies that causes even more capital to flow out of emerging markets. The process destabilizes the global financial system in turn.
QE and excess liquidity spills out in global financial markets. Far more money capital is available that can be profitably invested in real production. Investors turn to short-term financial asset investments. Speculative investing and financial asset prices and profits rise, drawing capital from real asset investment into financial assets. Capital flows increase in magnitude and frequency across countries, destabilizing the global financial system still further.

Not least, as already noted, the accelerating financialization of the global economy provoked by QE and unlimited liquidity injections by central banks leads to accelerating financial profits, income, and wealth by investor households that in turn results in growing income inequality and problems sustaining non-investor household consumption.

To summarize, monetary policies since 2008 are breeding dependency on free money from central banks, super-sensitivity to interest rate hikes, currency wars, competitive devaluations by means of exchange rate volatility, capital flight from emerging markets, excessive speculative investing and declining real investment that slows the real economy making it difficult to create jobs, reduce unemployment and sustain household consumption, and in general exacerbate hot money flows globally that destabilize the global financial system.

Contradictions in Fiscal Policy are no less significant.

Fiscal policies are also becoming less effective in generating real economic growth. Contrary to what liberal economists argue, deficit spending per se does not stimulate economic growth. The composition of that spending is key, not just its magnitude (business tax cuts vs. direct spending by government). Business tax cuts don’t create many jobs any longer since, in a global economy, they are easily diverted offshore or into financial investments by corporations today; or used to buy back stocks, pay dividends, retire debt; or just hoarded as retained earnings in offshore tax havens or in companies’ foreign subsidiaries. What economists refer to as tax multipliers have thus declined significantly in the 21st century global capitalist world, rendering fiscal stimulus policies less effective.

Not just tax multipliers, but government spending on subsidies to states, rather than on direct federal job creation, results in a smaller multiplier effect than in the past, producing fewer jobs as state and local governments, like corporations, don’t hire but pay down debt or hoard cash. Conversely, government deficit spending cuts and austerity fiscal policies have a larger negative multiplier effect, as government entities prefer to lay off workers and reduce spending on programs in lieu of committing cash to spending.

A further reason why multiplier effects have declined is household consumers have become more ‘fragile’—that is, they have accumulated excessive debt loads and face stagnating or declining income gains. Government spending and tax cuts targeting consumer households thus get diverted to retiring debt or paying for inflationary increases for essential goods and services that was once covered by rising wage incomes.

To summarize with regard to fiscal and austerity policy, government spending and tax cuts no longer have the same positive effect on economic recovery they once had. Greater household debt and stagnating incomes reduces the effect of fiscal stimulus. That same debt and income stagnation makes austerity fiscal policies in turn more effective in terms of reducing consumption. Austerity multipliers are greater, while fiscal stimulus multipliers are smaller. Austerity serves to contract the economy, but does so more effectively than tax cuts and spending stimulate the economy. In order for fiscal stimulus policies to return to past effective levels, major structural changes will have to occur in the economy: incomes will have to be redistributed from the wealthiest households and toward the middle and working classes by means of a number of measures, while debt levels will have to be reduced or debt expunged.

Some Conclusions

Best case, the financial crash, deep recession, and subsequent two decades long (1992-2012) stagnation of Japan may well represent the most likely scenario for the global economy in the decade immediately ahead. Worst case, a second banking collapse—this time most likely originating in Europe or Asia—could accelerate the process of general global stagnation, precipitating yet another sharp global economic contraction that would almost certainly prove worse than the 2009-09 crash.

The latter scenario may more accurately represent the future since it has become increasingly clear that global capitalist fiscal-monetary policies in the world’s major capitalist sectors—North America, Europe, Japan—have been declining in terms of their stimulative effects on economic recovery. Simultaneously, the same policies are producing more and more negative effects that are in fact now increasingly holding back economic recovery. Since these policies are converging across the main capitalist economic sectors, the negative effects are growing as the positive effects of such policies are declining. The net result is a gradual slowing of the global economy.

And as that long term growth slows, the global system becomes in turn more fragile and susceptible to another financial-banking crisis should such occur. The economies of the major sectors will continue to experience periods of short term growth, to be followed by relapses of growth rates or double dip recessions. Recoveries will prove short and shallow, as will the downturns. This produces the appearance of a ‘bouncing along the bottom’ or a ‘stop-go’ economic recovery scenario.

But corporations, bankers, and capitalist policy makers have no solution to this. They will continue to adhere to some form of monetary policy first and foremost, to keep the for-profit banking system afloat beyond all else. They will continue subsidies and preferential tax and subsidy treatment for the non-banking business sector, paid for by forms of austerity policies, some more severe than others, levied on the wage earning public.

For in the end these same policy makers believe that a strategy of ‘bailing out the banks’ and then waiting for the ‘market system’ to heal the rest of the economy over time is the proper approach. That waiting may take years and even decades, however.
In the interim, the ‘healing’ is more likely to represent an act of medieval ‘blood-letting’ on a patient suffering from a terminal heart condition.

Jack Rasmus
Copyright 2013

Jack is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, and host for the weekly radio show, ‘Alternative Visions’, on the progressive radio network, PRN.FM. His website is:, he blogs at, and his twitter handle is @drjackrasmus.

(NOTE: for the various charts and graphs accompanying this article, see the article as it appears in ‘Z’ magazine, November 2013.)

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