What
happens to the US economy when the Federal Reserve stops printing
money to buy mortgage based securities, treasury notes, and other
bonds? What happens when that body stops injecting 85 billion dollars
into the US economy every month?
These
questions torture the economic pundits in the mainstream press.
Contrary
to what most believe there has been no recovery. The reports from
the other principal global economies have been dismal, recording
stagnation or anemic growth. In the mean time, the US economy has
been sustained by forced feeding. The Federal Reserve quietly prints
notes and takes around 85 billion dollars worth of various securities
off the market and parks them on the Fed's balance sheets. The
announced reasons for this action are to keep interest rates low,
attracting borrowers, and to thus stimulate business growth and job
creation. An unannounced consequence of the 85 billion dollar
injection has been a surge in equity markets and housing prices.
Since both stock portfolios and home values are the principal
components in the psychological “wealth effect” -- the
subjective, personal sense of financial well-being -- they have
spurred the impression of recovery and consumer confidence. Behind
this conjured image of recovery, the US economy continues to stagnate
and erode.
Whenever
the Federal Reserve has suggested that it might slow or end this
life-support, markets have dropped precipitously.
Obviously,
the Federal Reserve program, dubbed “quantitative easing,” is a
back-door stimulus program. Not a stimulus program of the New Deal
type, not public works and public jobs, but more a reclamation of the
garbage piled up after the massive, destructive party thrown by the
financial sector and a rekindling of the pre-crisis euphoria. No
one in the political establishment, neither Republican nor Democrat,
had the stomach for a full-blown New Deal program, nor did they have
any desire to pass even a little of the cost of a fix-up on to their
corporate masters.
So
the task of recovery fell in the lap of the Federal Reserve, an
ostensibly independent non-political body. The Federal Reserve is not
political, except when it is. While it can't be dictated to by the
branches of government, its make-up of ivy league professors and
financial industry veterans guarantees loyalty to corporate moguls.
It also keeps an ear open to the powerful as well as the rich. On
occasion the Fed even hears the voices from the barricades, but only
when they are at the barricades!
It
shares that “independence “ with the Supreme Court. Like the
Supreme Court, the Fed gets occasionally chastised when it either
missed or failed to get the message of a ruling class change in
policy.
All
central banks boast of their independence, but all listen closely for
a shift in political favor. The Central Bank of Japan recently
demonstrated its fealty to political change. With the election of
Shinzo Abe as Prime Minister, the Bank relented to his pressure and
began a policy of quantitative easing with the goal of doubling
Japan's money supply in two years. Abe, a right-wing nationalist,
advocates purchasing securities and bonds through a speed-up of the
Bank's printing presses, but makes no effort to conceal his real
goal: radically reducing the exchange rate of the national currency,
the Yen.
Like
his foreign policy initiatives, Abe's currency policy is a bold act
of aggression, in this case, economic aggression. A weak yen makes
Japanese manufacturing products cheaper in global markets, giving
Japan a competitive edge against other global manufacturers. The rise
of Japanese nationalism has not gone unnoticed by other Asian powers.
Chinese demonstrators have trashed Japanese cars in a way reminiscent
of similar spectacles in the US decades ago. Japanese automobile
sales have dropped sharply in the PRC.
While
retaliation may well be on the horizon, the Abe policies have brought
a sharp drop in the Yen's value, but also great volatility in Asian
equity markets.
Similarly,
for all the US Federal Reserve's aggressiveness in printing money,
the stock market's surge and the recovery of housing prices have
masked serious issues plaguing the real US economy.
[June
2: “Investors have ignored poor economic news as stocks have
risen... The Basil, Switzerland based Bank of International
Settlements said... that central banks' policies of record low
interest rates and monetary stimulus had helped investors “tune
out” bad news-- every time an economic indicator disappointed,
traders simply took that as confirmation that central banks would
continue to provide stimulus.” as reported by Fox News.]
Disposable
personal income growth is collapsing, for example. Excepting the
2008-2009 collapse, disposable personal income growth was lower in
2012 than any time since 1959 and is trending even lower in 2013. Not
surprisingly, the personal savings rate-- a rate that grew
dramatically after the frivolity leading to the 2008-2009 collapse--
has now dropped sharply. Clearly, workers are taking home less
while reducing their savings to pay the bills. While
unsustainable, this tact has buoyed consumer spending.
[May
31: The Commerce Department reported a .2% pull back in consumer
spending for April, 2013.]
Manufacturing
production in the US has declined for three of the last four months.
Caterpillar Inc., a bell weather of the basic manufacturing sector,
has witnessed factory orders of machines, calculated on a rolling
three-month average, decline steadily throughout 2012, moving into
negative territory at year's end.
Hyper-exploitation
in 2009, in the form of unprecedented gains of productivity growth,
pulled the US economy from its nadir. But since 2009, productivity
gains have slackened with a substantial decline in the last quarter
of 2012 and only a very modest recovery in the first quarter of 2013.
Consequently, anemic corporate revenue growth is increasingly
crimping earnings, once again threatening the rate of profit.
Pressures
on profit are demonstrated by the falling yield on junk bonds. The
demand for yield-- the never-ending search for a higher rate of
profit-- has driven the yield on the riskiest investments lower than
at any time in recent memory (a leading high-yield bond index records
a return below 5%, the lowest since records began in 1983!).
Conversely, treasury bonds, once popular as a safe haven, are now
commanding greater and greater yield despite the fact that the
Federal Reserve gobbles them up and removes them from bond markets.
Obviously, investors do not want safe Treasuries; investors do
want risky junk bonds! The gap between Treasury yields and junk bond
yields are narrower than any time since 2007. Are we skating on the
same thin ice, the same crisis of accumulation?
Accelerating
private debt in Asia suggests that much of the capital seeking higher
profit growth rates has landed there. But Asia is not the hot bed of
growth that it was a few years ago. The mounting private debt in
Asian economies supports risky, speculative projects and services
like commercial and residential real estate. With international trade
tepid, these once export-leading countries are attempting to sustain
growth through speculation and the hope of global recovery. The new
Chinese leadership seems determined to reduce the role of the state
sector, market regulation, and public financing, the very factors
that allowed the PRC to painlessly weather the global crisis. They
are determined to entrust the fate of the economy to global markets.
The simultaneous shrinking of government debt and the explosion of
private debt underline this policy shift.
[May
31: The Reserve Bank of India reported the lowest annual GDP growth
rate in a decade for the end of the fiscal year, March 31.]
The
once robust South American economies are also slowing. Exports to the
PRC are declining and exports to the EU are on the skids, retarding
growth throughout the region. Stagnant growth presents new challenges
to the conservative neo-liberal regimes on the continent as well as
the more progressive social democratic governments. Nor do South
American economies offer any relief, as they have until recently, to
the global economy.
And,
of course, Europe is in a depression-- a deep and profound
depression. The EU as a unity faces both centrifugal and centripetal
forces that challenge any policy resolution. Moreover, the major
parties – conservative, liberal, and social democratic-- have
exhausted their policy toolboxes. Until a new road is chosen, the
European Union will only drag the world economy towards a similar
fate.
[May
31: Eurostat reports the EU unemployment rate reached a new high--
12.2% in April-- the highest level ever recorded since euro-wide
tracking began in 1995.]
The
global economy faces two stubborn challenges: first, a crisis of
accumulation and second, an insufficiency of global demand. They
are, of course, inter-related, continuation of the 2008-2009
collapse, and immune to conventional treatment. The vast inequalities
of wealth and the resultant massive accumulation of capital hungering
for investment opportunities (driven by Marx's tendency for the rate
of profit to fall) stand at the center of the lingering crisis.
Capital continues to seek increasingly risky and unproductive profit
schemes, schemes that strangle productive, socially useful (but
unprofitable!) activities. At the same time, the crisis has
immiserated millions and idled a vast mass of human capital. Left
with limited resources and limitless insecurities, these casualties
of the crisis have necessarily reduced their patterns of consumption.
A shrinkage in global demand followed.
Some still harbor
illusions of taming capitalism and slaking its thirst for profit. As
the years of crisis continue, it looks more and more like the beast
must be slaughtered.
Zoltan
Zigedy
zoltanzigedy@gmail.com
