Storm Clouds?

As the panic over the destiny of the Federal Reserve's “quantitative easing” program reaches hysterical proportions, uncommonly bizarre economic anomalies are surfacing. In the last week of June, the news that first quarter US Gross Domestic Product growth report was reduced dramatically from 2.4% to 1.8% was met by an equally dramatic, but paradoxical positive jump in equity markets. Normally, a rather staggering drop in GDP estimates would trigger stock market losses-- investor confidence would be battered. But the opposite occurred. 

What's going on?

Pundits and investors hailed the bad news because they hope that it will keep the Federal Reserve committed to the $85 billion per month bond purchasing project dubbed “quantitative easing.” They believe that the Fed would not dare to relax the program in the face of poor economic performance. And they recognize that without the Fed’s foot firmly pressing the accelerator, the capitalist economy will stagnate or slow. The Federal Reserve program is truly a life-support system for our economy, and capitalism's apologists recognize that they are in deep trouble without it. Therefore, investors welcomed the fall in GDP growth!

Even Paul Krugman, the popular voice of social democratic theory in the US, has caught the contagion of fear. In a late-June appeal in The New York Times (Et tu, Ben?) to Federal Reserve head, Ben Bernanke, Krugman calls for the Fed to keep its foot aggressively on the gas pedal. A firm advocate of an alternative policy option, fiscal stimulus (spending on infrastructure, public works, etc), Krugman holds his nose and urges the continuation of the Fed's monetary stimulus program of printing money for bond purchases.

So why can't we just all agree to get along and urge the Federal Reserve to keep printing dollars?

In the first place, the Fed's policy of dollar-printing promiscuity is losing its healing powers. The effect of the purchase of government debt-- Treasury notes-- in order to restrain bond yields and interest rates has diminished since mid-2012. Moreover, the Fed remedy has lost its magic entirely in May and June of this year, with the yield on the 10-year Treasury note rising by two-thirds, mortgage rates jumping about 27% from March to the end of June, and the US and European (except Germany) bond market experiencing a sell-off. All of these indicators demonstrate that quantitative easing, as a stimulus policy, is simply losing its punch.

The Federal Reserve sees its injection of $85 billion into the economy every month as a hedge against the dreaded deflation, a sure companion to stagnation or negative growth. They watch to see when inflation crosses their target of 2% in order to slap on the brakes to avoid an overheated economy. But there is no reason for the Fed to fret: inflation is well below their target, a clear sign that without monetary stimulus we would be in a deflationary period. Corporations are hoarding cash rather than investing: they are holding 5.6% of their total assets in cash, against a forty year average of 4.4%. It was weak business investment, in part, that caused the first quarter GDP growth revision downward by 25%.

The Chicago Federal Reserve's three-month moving average National Activity index remained in negative territory, underlining the diminishing effects of quantitative easing.

Aside from its ineffectiveness, quantitative easing poses more serious, more fundamental problems: Fed monetary promiscuity distorts markets and masks underlying economic processes. Given that a capitalist economy is an enormously complex organism made up of mutually interactive actors, commodities and processes, manipulating some of the central elements such as interest rates, the money supply, debt growth, etc. can have unforeseen and damaging repercussions in other sectors of the economy. Mechanisms fail and balances are disrupted. A therapy becomes an injury. This is a lesson that the leadership of the Peoples' Republic of China is learning from the volatility created by its shadow banking sector. Even with majority public ownership of the biggest banks, the informal private sector distorts the impact of policy decisions.

In Marxist terms, the massive Federal Reserve intervention in financial markets violates the law of value. That is, it replaces the exchange of equivalent-for-equivalent in financial markets, with exchanges determined independently of market forces by the officers of the Fed. Those exchanges must, at some point, be reconciled; but in the meantime, they distort exchange relationships in other sectors of the economy. They create a disconnect between the financial sector and the signals sent to the productive economy. They distort the rate of profit in the financial sector, channeling capital into speculation and over-reliance on cheap credit. It’s no wonder that corporations hoard cash and seek higher returns on retained capital and easily available capital.

In reality, quantitative easing invites the very conditions that led to the 2007-8 collapse.

And we are now seeing omens in the economic data.

The exuberant 2013 stock market is suffering a retreat, but even more ominously, demonstrating growing volatility. Last year, the small investor jumped back in the market, a sure sign that a bear market was in sight. Much of the volatility comes from market manipulators exploiting the amateur day-traders. Like the swaggering Vegas weekend gambler, they are ripe for the picking. One can watch the picking by following the end-of-day trading; they don't know when to get in or when to get out.

US exports are pulling back.

The post-World War II record profits reported in 2012 are threatened. Of 108 companies scheduled to report profits in the second quarter of 2013, 87 offered negative guidance to their shareholders. Falling profits, contrary to underconsumption theorists, are a better predictor of a downturn than falling consumption. Consumption generally falls as a result and as an amplifier of economic decline.

Today, US consumption hangs precariously in the balance. While savings are declining, wages are in free fall. The year ending in September 2012 experienced a wage decline of 1.1%. First quarter estimates augur a shocking decline. The consumer is simply running out of money, savings, and available credit.

And the just announced June unemployment figures actually show an increase in the more telling U6 calculation to 14.3%. That rate includes those who have dropped out of the job market and those working part-time but desiring a full-time job.

Not a promising picture.

In most of the world's capitalist countries, the labor movements and left political parties have yet to decouple their fate from that of the monopoly capital, profit-driven, market-governed system. They are like ships on turbulent waters unwilling to bring their vessels and crew to port. They are simply counting on the storm to subside. They are neither prepared for nor expecting a hurricane or a shipwreck. After five disastrous years, one would hope that left and labor leaders would began to look for alternatives to capitalism, a safe haven for their fellow passengers.

Zoltan Zigedy

zoltanzigedy@gmail.com

The Global Economy: A Midyear Snapshot

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