This article cross-posted from Paul Craig Roberts website. Jobs offshoring, financial deregulation, and 10
years of wars have severely damaged the US economy and the economic prospects of
90% of the American population. The signs are everywhere in front of our eyes.
They are in the income distribution data, the Bureau of Labor Statistics (BLS) jobs data, the Census data,
the poverty figures, and the high number of food stamp recipients.
The signs are in the foreclosed and boarded-up homes
and the accompanying homelessness. They are in closed strip malls; in office
building, warehouse, and shopping mall vacancies, and in the huge population
losses of America's manufacturing cities.
The New Economy was a hoax, like Saddam Hussein's
"weapons of mass destruction" and the "war on terror." Americans were deceived
by "their" corrupt government, by greed-driven corporations, and by corporate
shills among economists and the pundit class into believing that they were
trading middle class "dirty fingernail" jobs in manufacturing for better middle
class "clean fingernail" high-tech service jobs. Instead, reasonably paid
manufacturing and professional skill jobs, such as software engineering and
information technology, were traded for lowly paid jobs as waitresses and
bartenders and for jobs in ambulatory health care.
Consequently, real median US income fell for the
vast majority of the population. To keep consumers spending when they had no
raises, the Federal Reserve used low interest rates to create a real estate and
credit bubble. The low interest rates drove up housing prices, and Americans
refinanced their mortgages and spent the equity in their homes. Americans maxed
out credit cards. The rise in consumer indebtedness kept consumer demand growing
and the economy afloat.
But there is a limit to how far debt can outpace
income, and the bubble burst. And when it burst, the financial fraud that had
been hidden in the euphoria was revealed. That set off the financial
crisis.
As the US government is controlled by financial and
armaments interests and not by the people, the government responded to the
financial crisis by shoveling more debt and more hardships on the American
people in order that financial interests did not have to pay for their own mistakes and crimes. Instead of
blaming the responsible parties, "our" government handed the bill to the
American people.
An important part of the bill is the huge number of
new dollars being created in order to keep "banks too big to fail" afloat and in
order to finance the federal government's enormous budget deficit from its
illegal wars. Sooner or later, the proliferation of dollars will cost the
American people sharply higher prices.
We will return to the dollar crisis later in this
column. First, let's look at what the loss of manufacturing and manufacturing
related jobs have done to the economy and the prospects of US
citizens.
In the first decade of the 21st century, Detroit,
Michigan, lost 25% of its population. Gary, Indiana, lost 22%. Flint, Michigan,
lost 18%. Cleveland, Ohio, lost 17%. In St. Louis, Missouri, 19% of the housing
is vacant. These population losses were not the result of the Black Plague or
killer viruses or a nuclear attack. They were the result of corporate CEOs,
pushed by their own greed, by the greed of Wall Street and that of large
retailers such as Wal-Mart, aided and abetted by "our" government into moving
offshore millions of manufacturing, software engineering, information technology,
engineering, research, development, and design jobs.
The process of moving American jobs offshore left
cities, counties, and states with shrunken tax bases. The resulting state and
local budget deficits are being used to dismantle public-sector unions and to
cut social services. Public assets, such as water companies, and future income
streams from parking meters, toll roads and bridges, are being sold off to
foreign buyers in order to insure another year of local and state government
solvency.
In the first decade of the 21st century, Americans
lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer
and electronic products fell by 40%; in the production of machinery by 30%, in
motor vehicles and parts by 44%, and in the manufacture of clothing by
66%.
In other words, in 10 years the US economy was
decimated by jobs offshoring for the sole purpose of higher rewards to capital
in the form of multi-million dollar executive bonuses and large shareholder
capital gains. A few hedge fund executives were paid a billion dollars in annual
renumeration and a couple of dozen of them were paid $500 million in annual
compensation. What sense does that make? Huge fortunes paid for one year's
work, not in productive activity but in destroying the financial system and the
value of pensions that tens of millions of Americans had worked their entire lives to
achieve.
While this was happening, "our" government
squandered several trillion dollars in Iraq and Afghanistan on wars based on
lies and deception. The American people were lied to and deceived, and continue
to be, in order that arms industries can enjoy record profits and in order that
crazed neoconservative war criminals could pursue their ideology of world
hegemony and empire. We were even lied to about US war casualties. As Dennis Loo
points out in his book, Globalization and the Demolition of Society
(2011), the 4,801 Americans killed in action in Iraq leaves out the 50,000
suicides of veterans and active duty US troops. The truth of the matter is that
the casualties of the Iraq war are as high as those of the Vietnam
war.
With all income gains redirected to the financial
and war sectors, the distribution of income in the US has become, according to
the Organization for Economic Co-operation and Development (OECD), the worst of
all developed countries. The Central Intelligence Agency -- yes, the
CIA -- concluded that America had achieved not only the
worst income distribution of all developed countries but also a worst income distribution than Iran, Cambodia,
Uganda, Nicaragua, Russia, and China.
The economic "recovery" that Washington and the
financial press hype is all talk and no reality. The "recovery" is produced by
understating the inflation rate, which overstates GDP growth, and by dropping
the long-term unemployed out of the measurement of unemployment. An economy, the
driving engine of which has been moved offshore, cannot recover unless the
economy is brought back home, and that requires the repeal of Globalism.
Overstatement is common in order to produce good
news, but eventually it catches up with the spinmeisters. Last month the
National Association of Realtors reported that it had overstated home sales by
3.5 million. Statistician John Williams (
shadowstats.com) reports that the
"birth/death" model, which the Bureau of Labor Statistics uses to estimate the
net affect on jobs data of unreported business closures and new start-ups,
overstates the annual number of new jobs during troubled economic times by
approximately one million jobs annually. Each year the accumulated monthly
overstatements are quietly revised away by BLS.
Similarly, data can be understated in order to hide
bad news. The understatement of inflation results from basing the Consumer Price
Index (CPI) on substitution rather than on a fixed basket of goods, the
traditional method. During the "progressive" Clinton regime, a deceptive change
was made to the CPI. If the price of a good rises, for example, sirloin steak,
the higher price does not appear in the index. Instead, the CPI assumes that
consumers switch from sirloin to a cheaper cut, such as round steak. Thus, the
rise in prices is negated by substituting goods that represent a lower standard
of living.
By understating inflation, the government has been
able to produce a "recovery," when in fact the positive economic growth number
is created by counting inflation or nominal GDP growth as real GDP growth. John
Williams says that when inflation is measured in the old way, prior to Clinton,
the US has experienced essentially no real GDP growth in the 21st century. In
other words, we have had a decade of essentially no growth in the GDP while the
presstitutes in the media proclaim "recovery."
The government's forecasts of its budget deficits
are based on the assumption that an economic recovery is underway. If in fact
there is no recovery and the economy is about to worsen, the trillion-dollar-plus deficits that the government forecasts for as far as the eye can see will
be even larger. As more debt creation likely means more money creation by the
Federal Reserve, the future purchasing power of the US dollar appears to be
dismal.
The federal government's reckless issuance of debt in order to finance its
hegemonic wars and the Federal Reserve's misuse of its authority to create $16.1
trillion in secret loans to US and European banks (as revealed by the GAO audit
of the Fed) have created an enormous number of new dollars. In addition,
financial deregulation has resulted in banks creating paper claims on real
assets that far exceed the value of the underlying real assets. This is an
untenable situation. How is it likely to be resolved?
This is a two-part question: there is the banks'
debt and there is the federal government's debt. Both are serious
problems.
Mortgage-backed derivatives exceed the value of the
homes, and Credit Default Swaps and other financial innovations have resulted in
the paper claims on assets exceeding the value of the underlying real assets.
Consider Credit Default Swaps, a form of unreserved "insurance." Investors --
really speculators -- do not have to own a Greek government bond or a
mortgage-backed derivative in order to purchase a "swap" that insures its value.
Thus, the total value of swaps issued on Greek bonds, for example, can far
exceed the total value of Greek bonds. The value of swaps issued on
mortgage-backed securities can exceed the total value of mortgaged real
estate.
Financial institutions, such as US banks, that sold
"swaps" on Greek bonds were gambling that Greece would be bailed out and would
not default. The financial institutions regarded as gravy the fees paid to them
for "guarantees" on which they cannot make good. I don't know the extent of
swaps on sovereign debt, but I recently saw a report that the Bank of America
alone has sold $2.1 trillion in swaps on sovereign debt. Imagine the crisis if
the Bank of America had to pay off these swaps.
Obviously, if European sovereign debt blows up, the
US financial crisis will become deeper.
The GAO audit of the Federal Reserve showed that the
Fed made secret loans to banks of $16.1 trillion between December 2007 and June
2010. To put that figure in perspective, it is larger than the US GDP and
larger than the US public debt. In other words, it took a tremendous amount of
new money to keep the financial system from collapsing. Despite this huge sum
pumped into the banking system, the banks are still regarded as weak and
troubled. The insecurity of bank depositors is reflected in the one basis point
interest rate on Treasury bill money funds. Many Americans are willing to
receive a negative interest rate in order to have their money in instruments
that can be paid off with newly created money.
When the paper claims on assets exceed the value of
the underlying assets, one solution could be slow write-downs of bad paper over
time as the banks' profits permit. This would require suspending the
mark-to-market rule and permitting the banks to remain "solvent" by counting
bad assets as good until profits permitted write-downs.
This would be a sensible solution if the banks
have profitable prospects. But with consumers too indebted and broke to
borrow and the consumer market too impaired for good sales prospects for
businesses, what profitable prospects do banks have? Only those created by the
Federal Reserve's support of the "carry trade," the ability of financial
institutions to borrow from the Federal Reserve at essentially zero interest
rates and to put the money in Greek and Italian sovereign debt. This is
gambling, otherwise known as "casino banking."
If reality rules out the solution of gradual
write-downs, all that remains is bankruptcy or inflation. The Federal Reserve
and the US government have ruled out permitting the banks to fail. That leaves
inflation.
Except for a relatively few indexed Treasury bonds,
financial instruments are in nominal values. Thus, bad debts can be inflated
away by driving up the nominal values of the underlying real assets and the
nominal values of wages and salaries. It seems that the path that policymakers
are taking is to reduce the purchasing power of money in order to drive up
nominal asset values so that they exceed the claims against them.
For example, consider a person with a $200,000
mortgage whose home, if he could sell it, is only worth $175,000. This person's
asset is under water. However, if inflation drives up the price of his home to
$250,000, the person has gone from a balance sheet $25,000 in the red to one
$50,000 in the black. It seems clear that, in order to save the financial
institutions and itself, the government will sacrifice the purchasing power of
the dollar.
Thus, the same solution appears to be in effect for
the government's growing debt. For the moment, the US dollar is benefitting from
flight from the euro due to the hyped sovereign debt crisis in Europe. As in the
past, a scared financial world takes refuge in the dollar and in US Treasury
debt instruments. The main difference between Greece's indebtedness and
America's is that Greece cannot print euros, but the US can print dollars. Thus,
holders of US debt can always get back the nominal dollar value of Treasury debt
issues. Of course, the real purchasing power of these printed dollars can be
very low.
The dollar as a refuge is a short-run phenomenon.
Once the transfer out of euros into dollars has occurred, how does the Treasury
sell the next round of bonds to finance trillion-dollar deficits? Sooner or
later the Federal Reserve will be back to monetizing the new Treasury bond
issues; that is, the Federal Reserve will create new money with which to
purchase the new Treasury bond issues.
Sooner or later the new money will find its way into
the economy and drive up prices, or the continual monetization of new US
Treasury debt will cause the world to lose confidence in the dollar. Heavy
sales of US dollars in currency markets would drive down the exchange value of
the dollar and raise the prices of imports such as energy, manufactured goods,
and food. Either way inflation is the result. Indeed, both can occur together,
which is the likely result.
Normally, inflation is associated with a booming
economy, but as too much of the US economy has been moved offshore, there is
little left to boom other than prices. Therefore, the combination of high
inflation with high unemployment is a likely fate that awaits
Americans.
I cannot predict how long policymakers can hold
economic armageddon at bay with spin, money creation, currency swaps,
intervention in gold and silver markets, and outright lies. The onset could be
sudden and take place this year, but we shouldn't underestimate the power of
spin over a gullible public that trusts "their" government and fervently
believes that Muslim terrorists are out to get them and that the demise of the
Constitution, the product of an 800-year struggle that produced
Anglo-American civil liberty, is worth the price of "safety."
There is no safety in a police state and a debauched
currency. The comfortable world that Americans have known is falling apart at
the seams.