Category: Economy
A Tsunami of Finance: German Expert Warns of Imminent Collapse of ‘World Casino’
| October 12, 2017 | 8:17 pm | Analysis, Economy, Imperialism | No comments

https://sputniknews.com/analysis/201710121058158469-financial-tsunami-global-system/

A Tsunami of Finance: German Expert Warns of Imminent Collapse of ‘World Casino’

Tsunami

A Tsunami of Finance: German Expert Warns of Imminent Collapse of ‘World Casino’

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Financial expert Ernst Wolff gives Sputnik a taster of his new book, which warns that dependence on the financial industry and the US dollar has created a “financial tsunami,” the consequences of which the world is wholly unprepared for.

Financial expert Ernst Wolff, author of a bestselling analysis of the International Monetary Fund‘s “modern day crusade against the working people on five continents,” has turned his attention to the global financial system in his latest book.

Wolff sees the financial system at risk of imminent collapse and likens it to a “Financial Tsunami” which threatens to take us all by surprise, leaving devastation in its wake.

In a taster of the book’s contents, he told Sputnik Deutschland that the US-based financial industry has been on “life support” since the 2008 crisis and its prognosis “doesn’t look good.”

“The patient is about 75 years old. Our financial system was founded in in Bretton Woods, USA in 1944. The patient is in great difficulty because in 1998 and a second time in 2007/2008, he almost died. Since this second crisis, he has only been kept alive artificially. The financial system is lying in the intensive care unit.”

While most countries have a state central bank, US monetary policy is conducted by the Federal Reserve, a consortium of 12 regional banks in which commercial banks own shares. Wolff describes the system as a “cartel.””One not only gives a patient a diagnosis, but also a case history. First, we need to understand the power of the Federal Reserve, the American central bank which was established a hundred years ago. Many people still don’t know that the Federal Reserve is not a state institution, but is in private hands. This is a bank cartel which lies in the hands of several large, very rich families. This fact has been covered up in the course of history.”

“Since 1944, the dollar has been the most important currency in the world, and since the mid-seventies it has been the most important reserve currency because oil, the most important and most traded commodity in the world, can only be traded in dollars.”


“But the dollar has been hit because the US has been hit. There is great competition on the world market, especially from China. However, it takes time to replace the world’s main currency. Those who have opposed the dollar until now have suffered a terrible fate. Saddam Hussein was the first to try to sell his oil in euros, and he was executed. Then Gaddafi tried the same in Libya, and we know how that ended. The conflict with Iran is also related to the fact that Iran has announced its intention to sell its oil in euros, and now we have the next flashpoint of this kind with Venezuela.”

Wolff says that the financial industry has grown in power along with the US dollar. The proportion of the world economy stemming from the financial industry has increased significantly in recent decades, although the exact figure depends on pinning down a definition of financial services.

The IMF estimates the total service economy to make up 60-65% of total global revenue, while the OECD has suggested that financial services comprise 20-30% of the total service market.

Wolff declared that “the financial economy is infinitely larger than the real economy and has been completely detached from the real economy by not producing anything of value.”

“In the last 30 years it has become a huge casino in which money is simply pushed back and forth. Since the system is built on loans that need to be serviced, more and more money must be pumped into the system. The central banks, such as the IMF or the ECB, are the largest manipulators of the financial system. They are printing more and more money, which they now offer for zero or negative interest rates.”

The financial system rules the world yet it seems impenetrable to most ordinary people, Wolff said.

“That’s the way it’s meant to be. Today, people in finance speak a language that a normal person can no longer understand. They hide behind it,” Wolff said, likening the discourse to the “Doublespeak” in George Orwell’s book 1984.

“You mustn’t lose yourself in the details, you have to see the big picture. With derivatives, for example, there are all sorts of options — puts, options, calls, swaps. You don’t have to know all the differences. You just have to know that derivatives are financial betting. And this huge bookmaker threatens us all.”

Wolff said that the finance industry is to blame for many of the problems currently facing Europe, which at first glance seem unconnected.

“The two prime causes of the refugee crisis are social inequality and wars. The financial industry is at fault for both. In the background, big investors are making money from wars and also treat the third world like a Christmas tree.”

Can we talk about our relationship to the oil industry? It’s not our savior | Opinion
| September 29, 2017 | 7:58 pm | Analysis, Economy, Local/State | No comments

http://www.nola.com/opinions/index.ssf/2017/09/time_to_face_the_crude_truth_a.html

Can we talk about our relationship to the oil industry? It’s not our savior | Opinion

Tugboats tow the Delta House oil and gas production facility away from port facilities in Aransas Pass, Texas and into the Gulf of Mexico. Covington-based LLOG Exploration began installing the $2 billion production facility in the Gulf of Mexico in late September 2014. (Photo by Redding Communications)
Tugboats tow the Delta House oil and gas production facility away from port facilities in Aransas Pass, Texas and into the Gulf of Mexico. Covington-based LLOG Exploration began installing the $2 billion production facility in the Gulf of Mexico in late September 2014. (Photo by Redding Communications)(Bob Redding)

Louisiana and its politicians have long embraced some unhealthy myths: Corruption in our politics isn’t so bad. Teachers are the real problem with our schools. Poor people are lazy. Climate change is a hoax. Oil is crucial to our economy because it employs so many workers and funds our government.

Few myths have damaged us more than the last one. Our blind allegiance to oil and gas has led to lax or poorly enforced environmental laws. The worst actors in the industry have contributed to the disappearance of our wetlands and poisoned our water.

And our eagerness to subsidize this industry has cost us billions in tax revenue. A 2015 report by the Legislative Auditor found that one exemption from one state tax — the severance tax on horizontal drilling — resulted in the loss of $1.1 billion from 2010 to 2014. Last year, the 27 state tax exemptions Louisiana grants to oil and gas interests amounted to $195 million. In 2012, during the height of the oil boom, the state let slip away $527 million in oil revenue; the following year, $462 million.

Since 2013, Louisiana has absolved one natural gas company, Cameron LNG, of more than $3 billion in property taxes. Since 2010, the state has awarded Cheniere Energy and its subsidiaries more than $3 billion in local and state tax subsidies. And in 2016, Louisiana gave Venture Global LNG $1.86 billion in property tax exemptions.

Total permanent jobs promised by those companies in return for the tax exemptions: about 1,400 (an average of $5.5 million in state and local subsidies per job). Industry officials claim without these generous tax breaks, they cannot afford to do business here.

That might be a stronger argument if energy exploration and refining weren’t already among the most profitable enterprises on Earth. Five of the 12 largest corporations in the world (by revenue) are oil companies, despite the slump in oil prices.

But these corporations provide plenty of good jobs for Louisiana workers, right? “The Louisiana oil and gas industry is one of the leading employers in the state,” the Louisiana Mid-Continent Oil and Gas Association claims. The most recent employment numbers on its website — 64,000 — are from 2013, when oil was around $90 a barrel. The American Petroleum Institute (API), meanwhile, claims 291,00 Louisiana workers were employed in the industry in 2015.

The August 2017 report on industry employment from the Louisiana Workforce Development Commission, however, pegs the number working in or supporting oil and gas at about 40,000 or 2 percent of Louisiana’s total workforce. It’s likely the API’s 2015 numbers were wildly inflated. Even Louisiana oil industry lobbyists acknowledge a sharp jobs downturn caused by slumping oil prices.

Nationally, the API claims the oil and gas industry employed more than 10.3 million direct and indirect workers in the U.S. in 2015. Meanwhile, the BLS, which does not count indirect jobs, estimates the industry’s current national job number is 178,000.

Counting indirect jobs from a specific industry is an inexact science, so let’s consider only the API’s claim of 2.9 million “direct impact” jobs in 2015. According to the API study, almost a million of those jobs were at gas stations, where employees also sold cigarettes, beer and slushies.

The myth of oil as a once-and-future major employer and massive contributor to the economy is dangerous not only because it absolves the industry from paying its fair share in taxes; the myth also has strengthened the industry’s case as it lobbies to avoid or evade environmental regulations in Washington and the states.

The jobs narrative has led to another harmful myth: We can have oil industry jobs or a clean environment, but we cannot have both. Well, look no further than California, where the nation’s toughest environmental regulations exist in harmony with a vibrant oil and gas industry. (To their credit, Gov. John Bel Edwards and six coastal parish governments are suing to hold oil companies accountable for how they damaged portions of our coast.)

Pitting jobs against a clean environment is also how industry supporters crush regulations to address climate change. That jobs-versus-environment argument ignores that oil and gas companies are automating tasks that once required warm bodies.

The real issue is not jobs so much as how states like Louisiana suffer when the oil and gas industry doesn’t pay its fair share in taxes. As the oil companies automate, their profit margins will increase. And their lobbyists continue persuading legislators in places like Louisiana, Texas, Oklahoma and Washington, D.C., to increase or maintain billions in “drilling incentives.”

For decades, Louisiana has acted like providing corporate welfare to the oil industry is our patriotic duty. We’ve behaved like a feckless colony and allowed oil companies to swoop in, scoop up our oil and gas and pay us little in return. The industry buys the fealty of our politicians who have persuaded us that it’s our salvation.

It’s not. And if Louisiana wishes to enter the 21st Century, it’s time to wake up, smell the crude and quit behaving like a third-world petro state.

Robert Mann, an author and former U.S. Senate and gubernatorial staffer, holds the Manship Chair in Journalism at the Manship School of Mass Communication at Louisiana State University. Read more from him at his blog, Something Like the Truth. Follow him on Twitter @RTMannJr or email him at bob.mann@outlook.com.

1 in 3 U.S. families struggle to afford diapers: report
| September 25, 2017 | 8:35 pm | Economy, Poverty in the USA | No comments

http://www.nola.com/family/index.ssf/2017/09/families_cant_afford_diapers.html

Updated on September 25, 2017 at 2:57 PM

A survey by Huggies in partnership with the National Diaper Bank Network finds one in three families in the United States struggles to afford diapers for their children, CBS News reports.

The report says the average cost of diapers for one child is $18 a week, or $936 a year. The cost is pushing some families to experience what the survey calls “diaper need” – the struggle to provide enough diapers to keep a baby or toddler clean, dry and healthy on a consistent basis.

Experts say keeping children in dirty diapers longer not only increases health risks, including urinary tract infections and diaper rash, but can also lead to emotional stress and depressive symptoms in parents stressed about not being able to provide for their children, the report says.

The report says the survey questioned parents in 1,000 U.S. households with young children, more than two-thirds of whom are married and employed.

Read the full CBS News report.

Let’s face facts: Louisiana is sick and dying | Opinion
| September 10, 2017 | 8:44 pm | Economy, environmental crisis, Local/State | No comments

http://www.nola.com/opinions/index.ssf/2017/09/lets_face_facts_louisiana_is_s.html#incart_most-readopinions

Let’s face facts: Louisiana is sick and dying | Opinion

Two questions have dogged me lately: If I could go back 18 years, would I raise my children in Louisiana? Would I still view this as a place that would nurture and educate them, offer opportunities for personal and financial growth and help my wife and me imbue in them the values important to us?

When my son and daughter were born, I believed the answer was yes. I had hope. Even three years ago, I still had faith in Louisiana, as I wrote in a column to young people who considered abandoning the state: “Stay here, find like-minded people, organize them, expand your influence, demand change, but don’t give up on this amazing, beautiful place. Its good people — flawed as we might be — are worth your efforts.”

When I wrote that, I believed Louisiana had brighter days. I hoped there was a small flame of desire to recreate something great here. I thought Louisiana’s people wanted to redeem their state.

I was wrong.

Today, I ask only, “Is this as good as it will ever be?” The answer, I believe, is yes. It’s not getting better and could get much worse.

For all its rich and diverse culture and abundant natural resources, Louisiana is the sick man of the United States. We’re an economic basket case and a toxic waste pit of environmental neglect and misconduct.

We are the state most adept at missing opportunities and abusing and wasting our abundant natural resources.

Louisiana is my home in every way and, at 59, I cannot imagine living anywhere else. And yet it’s time to admit this is a place with no visible promise and little hope. To pretend otherwise is to engage in delusional thinking. We must face facts.

I’m not saying everyone should give up and leave. I’m staying and fighting for our future. There is much work to do, and I believe I can make a difference. I suspect most of you feel the same. But if we’re staying, we must be honest about Louisiana’s deplorable condition and bleak future.

Blame our leaders, if you like. But the problem is us. On average, we aspire to mediocrity; we are happy with good enough. We live in a land of plenty but view the world from an attitude of scarcity.

We mask our state’s profound illness and disease with colorful festivals and spicy food.

We tolerate — sometimes celebrate — our corrupt politicians. (Witness the recent outpouring of affection for disgraced former Gov. Edwin Edwards on his 90th birthday.)

Speaking of celebrations, nothing makes us happier than college football, which is our true religion. In the fall, we worship on Saturday nights in Tiger Stadium, the state’s holy shrine. Meanwhile, what transpires across campus — in the classrooms and lecture halls — barely concerns us.

Our elected leaders sell their souls to big oil and the chemical industry. The first has spoiled our land, pillaged our resources and damaged our coast, while the other has poisoned our air and water.

We are 47th in environmental quality. Perhaps it’s no coincidence we have the nation’s highest cancer rate.

Almost a third of our children live in poverty, the third-highest rate in the nation. That’s not changed for decades.

We have the seventh-lowest median household income and the third-highest unemployment rate. After decades of so-called “reforms,” we still have the worst public schools in the country. We’ve cut higher education funding more than almost every other state.

I could go on. We are first in almost everything that’s bad and last (or near last) in almost everything that’s good. In most cases, even mediocrity seems beyond our reach.

The experience of the last four decades should settle any question about whether Louisiana and its people will soon awaken from their coma of complacency. We know well the diseases of ignorance, poverty and pollution that afflict us — and have accepted them as sad facts, not obscenities.

The question isn’t whether there is much hope or aspiration left in Louisiana’s people. There is not. The question, instead, is whether this is a place our promising young people should abandon as soon as possible.

So here’s what I’ll tell my children: If you want to stay, then regard Louisiana as a mission field. However, if you want a place that will enlarge your life, expand your horizons, offer new opportunities and challenge your thinking, you should look elsewhere.

Our insular, prehistoric ways will not soon spawn a dynamic, creative culture to revive our economy and attract bright young minds to study at our universities and, after graduation, remain here to build a vibrant state. Our people have said loud and clear over the decades that we do not desire such a state.

It’s time to admit that Louisiana is sick and dying.

Robert Mann, an author and former U.S. Senate and gubernatorial staffer, holds the Manship Chair in Journalism at the Manship School of Mass Communication at Louisiana State University. Read more from him at his blog, Something Like the Truth. Follow him on Twitter @RTMannJr or email him at bob.mann@outlook.com.

Central Banks as Engines of Income Inequality and Financial Crisis
| September 3, 2017 | 7:12 pm | Analysis, Economy, Jack Rasmus | No comments

Central Banks as Engines of Income Inequality and Financial Crisis–print

Central Banks as Engines of Income Inequality and Financial Crisis–print

My just published book, ‘Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression’, Clarity Press, July 2017, is now available for immediate purchase on Amazon.com, as well as from this blog. (see book icon)

The following is an excerpt from an article by the title of this blog post, that appears in ‘Z magazine’s September 1 issue–describing how central bank policies have become a major contributor to income inequality, subsidizing and boosting capital incomes, as well as now are a primary cause of recurrent financial crises.

“CENTRAL BANKS AS ENGINES OF INCOME INEQUALITY AND FINANCIAL CRISES, Z Magazine, September 1, 2017”

“This September 2017 marks the nineth year since the last major financial crisis erupted in 2008. In that crisis investment banks Bear Stearns and Lehman Brothers collapsed. So did the Fannie Mae and Freddie Mac, the quasi-government mortgage agencies, that were then bailed out at the last minute by a $300 billion US Treasury money injection. Washington Mutual and Indymac banks, the brokerage Merrill Lynch, and scores of other banks and shadow banks went under, or were forced-merged by the government, or were consolidated or restructured. The finance arms of General Motors and General Electric were also bailed out, as were the auto companies themselves, to the tune of more than a hundred billion dollars. Then there was the insurance giant, AIG, that speculated in derivatives and ultimately required more than $200 billion in bailout funds. The ‘too big too fail’ mega banks—Citigroup and Bank of America—were technically bankrupt in 2008 but were bailed at a cost of more than $300 billion. And all that was only the US. Banks in Europe and elsewhere also imploded or recorded huge losses. The US central bank, the Federal Reserve, helped bail them out as well by providing more than a trillion US dollars in loans and swaps to Europe’s banking system as well.

Although the crisis at the time was deeply influenced by the crash of residential housing in the US. Few US homeowners were bailed out, unlike the big banks, insurance companies, auto companies, and other businesses. More than 14 million US homeowners were allowed to foreclose on their homes. A mere $25 billion was provided to rescue homeowners, and most of that going to bank mortgage servicing companies who were supposed to refinance their mortgages but didn’t. More than $10 trillion conservatively was provided to financial institutions, banks and shadow banks, and big corporations, and foreign banks by US policy makers in the government and at the US central bank, the Federal Reserve. $25 billion for 14 million vs. more than $10 trillion for capitalists and investors.

The Federal Reserve Bank as Bail Out Manager

A common misunderstanding is that the banking system bailouts were managed by the US Congress passing what was called the Trouble Asset Relief Program, TARP. Introduced in October 2008, TARP provided the US Treasury a $750 billion blank check with which to bail out the banks. But less than half of TARP was used, and most of that went to the auto companies and smaller banks. Only half of the $750 billion was actually spent. By early 2009 the remainder returned to the US Treasury. So Congress didn’t actually bail out the big banks—the AIG, Bank of America, Citibank, investors in the subprime mortgage bonds that collapsed, etc. The real bail out was engineered by the US central bank, the Federal Reserve, in coordination with the main European central banks—the Bank of England, European Central Bank, the Bank of Japan.

The Central banks bailed out the big banks. That has always been the primary function of central banks. That’s why they were created in the first place. It’s called the ‘lender of last resort’ function. Whenever there’s a general banking crisis, which occurs periodically in all capitalist economies, the central bank simply prints the money (electronically today) and injects it free of charge into the failing private banks, to fill up and restore the private banks massive losses that occur in the case of banking crashes. Having a central bank, with operations little understood by the general public, is a convenient way for capitalism to rescue its banks without having to have capitalist politicians—i.e. in Congress and the Executive—do so directly and more publicly. Central banks take the heat off of the politicians, who otherwise would have to raise taxes to bail out the banks—and thus incur the ire of the general public even more so than they do for not preventing the crisis.

From Bail Outs to Perpetual Bank Subsidization

But central banks since 2008 have been evolving toward a new primary function. No longer just bailing out the banks when they get in trouble. But providing a permanent regime of subsidization of the banks even when they’re not in trouble. The latter function is new, and has become a permanent feature of the capitalist global banking feature in the post-2008 period. For the US banks were fully bailed out by 2010. But the US central bank, the Federal Reserve, as well as other major central banks, have simply kept the flow of free money, often just printed money, into the banking system even after the banks were effectively bailed out. In other words, since 2010 the Federal Reserve has continued to provide free money to the banks and continued to buy up the collapsed subprime mortgage bonds from banks and individual investors. In short, it has been subsidizing the profits of the financial system for the past nine years.
With the Fed in the lead, in 2008-09 the central banks of the advanced capitalist economies simply created money—i.e. the dollars, the pounds, euros and yen—and allowed banks and investors to borrow it virtually free. That is, the Fed and other central banks simply opened electronic accounts for the banks within the central bank. Banks were then allowed to borrow that money that was ‘electronically printed’, at essentially no interest. It was free money.

But free money in the form of near zero interest was still not the full picture. The Fed and other central banks were also pro-active in providing money to the banks. The Fed and other central banks went directly to the banks, as well as other institutional and even private investors, and said: ‘we’ll also buy up your bad assets that virtually collapsed in price as a result of the 2008-09 crash. This direct buying of bad mortgage and government bonds—and in Europe and Japan, buying of corporate bonds and even company stocks—was called ‘quantitative easing’, or QE for short. And what did the central banks pay for the assets they bought from banks and investors, many of which were worth as low as 15 cents on the dollar? No one knows, because the Fed to this day has kept it secret how much they overpaid for the bad assets they bought from individual investors, bankers or corporations.

But the QE and the effectively zero interest rates continued for nine years in the US and the UK. And in 2015 it was accelerated even faster in Europe. And since 2014 faster still in Japan. And even in China after 2015, when its stock market bubble burst. Central banks of the major economies after 2008 have thus opened a ‘fire hose’ of free money to their private banks and their investors. And in the course of the past nine years, the private capitalist banking system has become addicted to the free money. They cannot ‘earn’ profits on their own any longer, it appears. They are increasingly dependent on the free money from their central bankers. This is a fundamental change in the global capitalist economic system in the past decade—a change which is having historic implications for growing income inequality worldwide in the advanced economies as well as for another inevitable global financial crisis that will almost certainly erupt within the next decade.

The $25 Trillion Banking System Bailout

In the last financial crisis of 2008-09, central banks rescued their private banks by ensuring zero interest rates at which they could borrow funds. But central banks went a step further. The Fed and others pro-actively went directly to banks and investors and bought up their collapsed subprime bonds and other securities as well. But we do know the total amount of ‘bad assets’ they bought? The total was more than $20 trillion—i.e. in free money provided at zero rates and by central banks buying the ‘bad assets’ from the banks and investors by paying them more than the collapsed market prices at the time for those mortgage bonds and securities.

In the US, the Fed officially purchased $4.5 trillion in ‘bad assets’ between 2009 and 2014. But it was actually more, perhaps as much as $7 trillion. That’s because as some of the Fed purchased bonds matured and were paid off, the Fed reinvested the money once again to maintain the $4.5 trillion. So US banks and shadow banks got free money loans at 0.1% interest rates for nine years, plus the Fed directly bought up additional securities from investors in the amount of around $7 trillion. The cumulative totals from the zero rates and QE bond buying are likely more than $10 trillion for the US alone. That’s how the US banks got ‘bailed out’, not by the US Congress and the TARP program.

But the same occurred by other central banks of the advanced economies. The 2008-09 crash was global, so the Fed was not the only central bank player is this massive money printing and bailout scam. The European Central bank, as of 2017, has bailed out Europe banks via its QE and other programs to the tune of $4.9 trillion so far. The Bank of England, another $.7 trillion. And the Bank of Japan as of mid-2017 by more than $5 trillion. The People’s Bank of China, PBOC, did not institute formal QE programs. But after 2011 it too started injecting trillions of dollar in equivalent yuan, its currency, to prevent its private sector from defaulting on bank loans, to bail out its local governments that over invested in real estate, and to stop the collapse of its stock markets in 2015-16. PBOC bailouts to date amount to around $6 trillion. And the totals today continue to rise for all, as the UK, Europe, Japan, and China continue their central bank engineered bail out binge, and in the case of Europe and Japan are actually accelerating their QE programs.

Conservatively, therefore, the total bail outs from QE and QE-like programs among the big central banks globally—US, UK, Europe, Japan, and China—amount easily to more than $25 trillion. That’s $25 trillion of money created out of thin air.

Contrary to many critiques of rising debt levels since 2009, it is not the level of debt itself that is the problem and the harbinger of the next financial crash. It is the inability to pay for the debt, the principal and interest on it, when the next recession occurs. So long as economies are growing, businesses and households and even government can ‘finance’ the debt, i.e. continue to pay the principal and interest some way. But when recessions occur, which they always do under capitalism, that ability to keep paying the debt collapses. Business revenues and profits fall, employment rises and wages decline, and government taxes collections slow. So the income with which to pay the principal and interest collapses. Unable to make payments on principal and or interest, defaults on past incurred debt occur. Prices for financial assets—stocks, bonds, etc.—then collapse even faster and further. Businesses and banks go bankrupt, and the crisis deepens, accelerating on itself in a vicious downward spiral. That’s a great recession—or worse, a bona fide economic depression.

Think of it another way: the $25 trillion plus is what the central banks transferred in bad debt from the balance sheets of the banks and private corporations to their own central bank balance sheets. In other words, the private corporate debt at the heart of the last crisis has not been removed from the globally economy. It has only been shifted, from the business sector to the central banks. And this central bank debt has nothing to do with national governments’ debt. That’s a totally additional amount of government debt, as is consumer household debt which, in the US, is more than $1 trillion each for student loans, auto loans, credit cards, and multi-trillions for mortgage loans. Ominously, moreover, in recent months defaults on student, auto and credit card debt have begun to rise again, already in the highest in the last four years in the US.

Finally, it’s not quite correct, moreover, to even say that the $25 trillion injection of money into the banking system since 2008 has successfully bailed out the banks globally. Despite the total, there are still more than $10 trillion in what are called ‘non-performing bank loans’ worldwide. Most is concentrated in Europe and Asia—both of which are likely the locus of the next global financial crisis. And that crisis is coming.

In the interim, the central banks’ free money and bank subsidization machine is generating a fundamental dual problem within the global economy. It is feeding big time the trend toward income inequality and it is helping fuel financial asset bubbles worldwide that will eventually converge and then burst, precipitating the next global financial crash.

The Fed as Engine of Income Inequality

In the US, the US central bank’s $4.5 trillion balance sheet—and the nine years of free money at 0.1% rates—have been at the heart of a massive income shift to US investors, businesses, and the wealthiest 1% households.

Where did all this $4.5 trillion (really $7 trillion), plus the virtually free borrowed money at 0.1%, go? The lie fed to the public by politicians, businesses, and the media was this massive free money injection was necessary to get the economy going again. The trillions would jump-start real investment that would create jobs, incomes, consumption and consequently economic growth or GDP. But that’s not where it went, and the US economy experienced the weakest nine year post-recession recovery on record. Little of the money injection financed real investment—i.e. in equipment, buildings, structures, machinery, inventories, etc. Instead, investors got QE bail outs and banks borrowed the free money from the Fed and then loaned it out at higher interest rates to US multinational companies who invested it abroad in emerging markets; or they loaned it to shadow bankers and foreign bankers who speculated in financial asset markets like stocks, junk bonds, derivatives, foreign exchange, etc.; or the banks borrowed and invested it themselves in financial securities markets; or they just hoarded the cash on their own bank balance sheets; or the banks borrowed the money at 0.1% from the central bank and then left it at the central bank, which paid them 0.25%, for a 0.15% profit for doing nothing.

This massive money injection, in other words, was then put to work in financial markets and multiplied several fold. Behind the 9 year bubbles in stock and bond markets (and derivatives and exchange as well) is the massive $7 to $10 trillion Federal Reserve bank money injections. And how high have the stock-bond bubbles grown? The Dow Jones US stock market has risen from a low in 2009 of 6500 to almost 22,000 today. The US Nasdaq tech-heavy market has surpassed the 2001 peak before the tech bust. The S&P 500 has also more than tripled. Business profits have also tripled. Bond market prices have similarly accelerated. The 9 year near zero rates from the Fed have enabled corporations to issue corporate bonds by more than $5 trillion in just the last five years.
So how do these financial asset market bubbles translate into historic levels of income inequality, one might ask?

The wealthiest 1%–i.e. the investor class—cash in their stocks and bonds when the bubbles escalate. The corporations that have raised $5 trillion in new bonds and seen their profits triple in value then take that massive $6 to $9 trillion cash hoard to buyback their stocks and to issue record level of dividends to their shareholders—i.e. the 1%. Nearly $6 trillion of the profits-bond raised cash was redistributed in the US alone since 2010 to shareholders in the form of stock buybacks and dividends payouts. The 1% get $6 trillion or more and the corporations and banks sit on the rest in the form of retained cash.

Congress and Presidents play a role in the process as well. Shareholders get to keep more of the $6 trillion plus distributed to them as a result of passage of legislation that sharply cuts capital gains and dividend taxable income. Corporations gain by getting to keep more profits after-tax, to distribute via buybacks and dividends, as a result of corporate taxation cuts as well.

The Congress and President sit near the end of the distribution chain, enabling through tax cuts the 1% and shareholders to keep more of their distributed income. But it is the central bank, the Fed, which sits at the beginning of the process. It provides the initial free money that, when borrowed and reinvested in stock markets, becomes the major driver of the stock price bubble. The Fed’s free money also drives down interest rates to near zero, allowing corporations to raise $5 trillion more cash from issuing new corporate bonds. Without the Fed and the near zero rates, there would be nowhere near $5 trillion from new bonds, to distribute to shareholders as a consequence of buybacks and dividends. Furthermore, without the Fed and its direct $4.5 trillion QE program, investors would not have the historic excess money to invest in stocks and bonds (and derivatives and currencies) that drive up the stock and bond prices to bubble levels.

The Fed, the central bank, is thus the initial enabler of the process, i.e. of the accelerating stock and bond prices that transfer so much income to the 1% when the buybacks and dividend payouts kick in. The Fed, as well as other central banks, is an originating source of the runaway income inequality that has plagued the US since late 1970s decade. It is not coincidental that income inequality began to accelerate about that time, which is also the period of which the Fed, and other central banks, themselves began to provide massive money injections to bankers and investors.

Income inequality is a function of two things. One the one hand, accelerating capital incomes of the 1% as a result of buybacks and dividend payouts that generate capital gains for the 1% which constitute nearly 100% of the 1%’s total income. On the other, stagnating or declining wage incomes of non-investor households. Inequality may rise if capital gains drive capital incomes higher; or may rise if wage incomes stagnate or decline; or may rise doubly fast if capital incomes rise while wage incomes stagnate or decline. Since 2000 both forces have been in effect: capital incomes of the 1% have escalated while wage incomes for 80% of households have stagnated or declined.

Mainstream economists tend to focus on the stagnation of wage incomes, which are due to multiple causes like deunionization, rise of temp-part-time-contract employment, free trade treaties’ wage depressing effects, failure to adjust minimum wages, high wage industry offshoring, cost shifting of healthcare from employers to workers, reduction in retirement benefits, shifting tax burdens, etc.. But they engage little in explaining why capital incomes have been accelerating so fast. Perhaps it is because mainstream economists simply don’t understand financial markets and investment very well; or perhaps some do, and just don’t want to ‘go there’ and criticize runaway capital incomes.

Central Banks as Source of Financial Instability

The fire hose of money that central banks still continue to provide the capitalist banking system provides the basis for the growing financial asset bubbles that have been occurring worldwide once again since 2009.

The zero interest rate and direct QE money continue to inject massive money and liquidity into the banking systems, at a rate far faster than investors can choose to reinvest it in real investment projects that produce real things, that hire real people, and provide real wage incomes that stimulate economic growth. As previously noted, the massive money injections are not flowing through the private banks into real investment and growth. The trillions of central bank provided money is flowing out of the advanced economies and into emerging economies; or it is flowing through the banks into the financial asset markets—i.e. stock markets, bonds, derivatives, etc.—driving up asset prices and creating bubbles in those markets; or it is being distributed in stock buybacks and dividend payouts; or it is just being hoarded in the trillions of dollars, euros, etc. on balance sheets of private corporations.

As a result of Fed and other central banks’ money injections now for decades, and especially since 2008, there is a mountain of cash—virtually trillions of dollars—sitting ‘on the sidelines’. That money is looking for quick, speculative capital gains profit opportunities. That means for reinvestment short term in financial asset markets worldwide. The mountain of cash moves in and out of these global financial markets, creating and bursting bubbles as its shifts and moves. Periodically a major bubble bursts—like China’s stock market in 2015. Or a housing speculation bubble here or there. Or junk bonds or consumer debt in the US. Or the bubble in US stocks which is nearing its limit.

A new global finance capital elite has arisen in recent decades, having directly benefited from and controlling this mountain of cash. There are about 200,000 of them worldwide, mostly concentrated in the US and UK, some in Europe, but with numbers rising rapidly in Asia as well. They now control more investible assets than all the traditional commercial banks combined. Their preferred institutional investment vehicles are the global ‘shadow banking system’. Their preferred investment targets are the global system of highly liquid financial asset markets. This system of new finance capitalists, their institutions, and their preferred markets is the real definition of what is meant by the ‘financialization’ of the global economy. That financialization is generating ever more instability in the global capitalist system. But it would not exist were it not for the decades of past central bank injection of free money into the global economy—an injection which has been accelerating since 2008.

Will the Central Banks Retreat?

In 2017 a minority of policymakers in the Fed and other central banks have begun to recognize the fundamental danger to their own system from their providing free money and QE bond and stock buying money injections. The injections have not succeeded in stimulating their real economies, they have not raised prices for goods and services which continue instead to slow and stagnate, they have not sufficiently reduce unemployment (when contingent jobs are considered), and they have not raised wage incomes while bloating capital incomes instead. They have been creating financial bubbles.

So led by the Fed, the central banks of the major economies are now considering raising interest rates from the zero floor and trying to reverse their QE buying. Central bankers will meet in late August 2017 at their annual Jackson Hole, Wyoming gathering. The main topic of discussion will be raising rates and reducing their QE bloated, $15 trillion cumulative balance sheets.

But as this writer has argued, they will fail in both raising rates and selling off their balance sheets. Just as they failed in generating real economic recovery since 2009. For the banking system has become addicted and dependent therefore upon their free money injections and their firehose of central bank bond-stock buying QE programs. Should the central banks attempt to retreat, they will provoke yet another financial and economic crisis. The global capitalist system has become dependent on the permanent subsidization of the banking system by their central banks after 2008. Bail outs and lender of last resort functions by central banks have transformed into a permanent subsidization function. The global capitalist system entered a new period after 2008, changing in ways fundamentally. One of those ways is a greater dependency on the capitalist state to maintain and expand levels of profitability. One of those ways is for their central banks to continue to provide free money.

But the contradiction is that continued free money provisioning is driving further income inequality as well as fueling the next financial crash.

Jack Rasmus is the author of the just published book, ‘Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depressions’, Clarity Press, July 2017. He blogs at jackrasmus.com. For more information see http://claritypress.com/RasmusIII.html. The book is now available for order on Amazon.com.

Synopsis of ‘Central Bankers at the End of Their Rope’ Book
| August 15, 2017 | 8:06 pm | Analysis, Economy, Jack Rasmus | No comments

Synopsis of ‘Central Bankers at the End of Their Rope’ Book

Synopsis of ‘Central Bankers at the End of Their Rope’ Book

Now publicly available for order from the publisher, Claritypress/RasmusIII.html, from public bookstores, and from this blog, the following is the synopsis of the book, ‘Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression’.

BOOK SYNOPSIS

“Central banks of the advanced economies—despite having been
designated by their respective economic and political elites as
their states’ primary economic policy institution—have failed
since 2008 to permanently stabilize the world’s banking systems or
restore pre-2008 economic growth.

Rather, central bank liquidity injections since the 1970s not only
produced the 2008-09 crisis, but they then became the central
banks’ solution to that crisis; and now promise to cause of the
next one, as a further tens of trillions of dollars of liquidity-
enabled debt has since 2008 been piled on the original trillions
before 2008.

Fed policy since 2010 has represented an historically
unprecedented subsidization of the financial system by the State,
implemented via the institutional vehicle of the central bank.
Central banks’ function of lender of last resort, originally
designed to provide excess liquidity in instances of banking
crises, has been transformed into the subsidization of the private
banking system, which today is addicted to, and increasingly
dependent upon, significant continuing infusions of liquidity by
central banks.

Taking away this central bank artificial subsidization of the private
sector, especially the financial side of the private sector, would
almost certainly lead to a financial and real collapse of the global
economy. It is thus highly unlikely that the Fed, Bank of England,
Bank of Japan or European Central Bank will be able any time
soon to retreat much from their massive liquidity injections that
have been the hallmark of central bank policy since 2008. Nor will
they find it possible to raise their interest rates much beyond
brief token adjustments. Nor exit easily from their bloated
balance sheets and extraordinary historic policies of liquidity
provisioning. That liquidity not only bailed out the banks and
financial system in 2007-09, but has been subsidizing the system
ever since in order to prevent a re-collapse.

Truly, as this book addresses in painstaking detail, central
bankers are at the end of their rope. Wrought by various growing
contradictions, central banks, as currently structured, have failed
to keep pace with the more rapid restructuring and change in the
private capitalist banking system. As a result, they have been
failing to perform effectively even their most basic functions, or
to achieve their own declared targets of price stability and
employment.

Official excuses for that failure are critiqued and rejected.
Alternative reasons are offered, including:
• the declining effects of interest rates on investment,
• the relative shift to financial asset investing at the expense
of real investment,
• failure of central banks to intervene and prevent financial
asset bubbles,
• the purposeful fragmentation of bank supervision across
regulatory institutions,
• mismanagement of the traditional money supply,
• rapid technological changes transforming the very nature of
money, credit and financial institutions and markets worldwide,
• monetary tools ineffectiveness and incorrect targets, and
• central bankers’ continuing adherence to ideological
notions of the mid-20th century that no longer hold true in the
21st—like the Taylor Rule, Phillips curves, and, in the case of ZIRP(zero interest rates) and NIRP (negative interest rates), the idea that the cost of borrowing is what first and foremost determines real investment.

Central banks must undergo fundamental restructuring and
change. That restructuring must include the democratization of
decision making and a redirecting of central banks toward a
greater direct service in the public interest. A Constitutional
Amendment is therefore proposed, along with 20 articles of
enabling legislation, addressing what reforms and restructuring
of central banks’ decision making processes, tools, targets,
functions, as well as their very mission and objectives, are
necessary if central banks are to become useful institutions for
society in general. The proposed amendment and legislation
defines a new mission and general goals for the Fed—as well as
new targets, tools and new functions—to create a new kind of
public interest Federal Reserve for the 21st century.

How Capitalist Central Banks Are Creating the Next Crisis–print
| August 13, 2017 | 8:56 pm | Analysis, Economy, Jack Rasmus | No comments

 

How Capitalist Central Banks Are Creating the Next Crisis–print

The following article appeared August 10 on Global Research, Canada, and other major blogs. The analysis is based on content from the just published book, ‘Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression’, by Dr. Jack Rasmus, Clarity Press, July 2017

“As central bankers, finance ministers, and government policy makers head off to their annual gathering at Jackson Hole, Wyoming, this August, 24-26, 2017, the key topic is whether the leading central banks in North America and Europe will continue to raise interest rates this year; another topic high on the agenda is when the three major central banks – the Federal Reserve, European Central Bank and Bank of England – might begin to sell off their combined $9.8 trillion dollar balance sheets that they accumulated since the 2008-09 banking crisis.

But the more fundamental question – little discussed by central bankers and academics alike – is what are the likely effects of further immediate rate hikes and/or commencement of central banks’ balance sheet reductions? The assumption is further rate hikes and sell-offs will have little negative impact on the real economy or financial markets. But will they? The effects of hikes and sell off will prove the opposite of what they predict.

Central banks in the US and Europe were grossly in error predicting in 2008 that massive liquidity injections and zero interest rates would re-stimulate their economies and return them to pre-crisis real GDP growth rates. They are now about to repeat a similar error, as they presume that raising those rates, and retracting excess liquidity by selling off balance sheets, will not have a significant negative impact on the real economy or financial markets.

Central banks’ balance sheets have been growing for almost nine years, driven by programs of zero-bound (ZIRP) interest rates and the introduction of firehose liquidity injections enabled by quantitative easing, QE, bond and other securities purchases.

After eight years, the official consensus among central bankers and government policy makers is that the 2008 shift to unlimited central bank liquidity and zero (or below) interest rates is now over. The front page business press and media lead story is that central banks are now about to embark collectively in a new direction – raising their benchmark rates and selling off their massive, bloated balance sheets. But don’t bet on it. They may find sooner, rather than later, that rates cannot be raised much higher and that balance sheets—now totaling $9.8 trillion for the US, UK and Europe alone—may not be reduced much, if at all, without provoking a further slowdown of their still chronically weak real economic recoveries, or without precipitating a serious contraction in equity, bond and other financial asset markets.
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Globally, balance sheet totals are actually far greater than the $9.8 trillion accumulated to date by the big 3 central banks—the Fed, Bank of England, and European Central Bank. When other major central banks, like Switzerland’s, Sweden’s, Canada’s and others are added, it’s well more than $10 trillion. And then there’s the nearly $5 trillion balance sheet of the Bank of Japan and the more than $5 trillion of the People’s Bank of China. Worldwide, central banks’ balance sheets therefore exceed well over $20 trillion…with the total still growing.

It’s equally important to understand that the $20 trillion in central bank balance sheet debt essentially represents bad debt from banks, corporations, and private investors that was in effect transferred from their private balance sheets to the balance sheets of the central banks as a result of nine years of bailout via QE (quantitative easing), zero interest rate free money, and other policies of the central banks. The central banks bailed out the capitalist system in 2008-09 by shifting the bad debts to themselves. In the course of the last 9 years, the private system loaded itself up on still more debt than it had in 2007. Can the central banks, already bloated with $20 trillion bail out bankers and friends once again? That’s the question. Attempting to unload the $20 trillion to make room for the next bailout—as the central banks now propose to do—may result, however, in precipitating the next crisis. That’s the contradiction.

Attempting to sell off such massive balance sheet holdings will prove far more daunting than those central banks now anticipate. And their coordinated raising of interest rates risks precipitating another recession – given their fundamentally weak economies with chronic low bank lending, slowing investment, stagnating productivity, contracting public investment, and lack of real wage income gains. For the global economy has undergone a major structural change in recent decades that has been rendering central bank interest rate policies increasingly ineffective with regard to stimulating real investment and growth, while simultaneously contributing to further financial fragility as well.1

The US Economy is Fragile and Weakening—Not Robust and Stable

All eyes are on the US central bank, the Fed, and what signals it gives at the Jackson Hole August 24-26 gathering, and the Fed’s subsequent policy committee in September. Will it continue to raise rates? Will it announce formally a schedule for balance sheet reduction in September? If the latter, will the announcement of sell-off be so minimal and token that it will generate a mere 0.25% hike in rates by year end 2018, as some pundits predict? Or will the psychological effects on investors – who have enjoyed eight years of record equity, bond, property, and derivatives asset price and thus extraordinary capital gains – consider the announcement as the signal to “cash in” and take their money and run, given the bubble levels already attained in equities, some bond markets, and real estate? And should the Fed continue to raise interest rates at a pace of 3 to 4 a year, what will be the impact on the US real economy?

Economic potholes are beginning to appear in a number of places. Bank lending to US business has declined sharply, now growing at only 2%; consumer loans for auto, mortgages and credit cards have halved over the past year; real investment and productivity have nearly collapsed; the so-called “Trump Bump” has dissipated; government investment has contracted below 2007 levels and infrastructure spending is still but a discussion envisioned for 2019 at the earliest, if at all; and job growth has been consistently low quality, resulting in wage stagnation or worse for the vast majority of the labor force.

In this unstable environment the Fed has nonetheless has announced plans to continue to raise interest rates and to begin selling off its balance sheet. The question is just how much and when? Consensus thinking at the Fed is that rates can continue rising 3 to 4 times a year at .25 basis points a crack through 2019 without serious negative effects. And that the Fed’s balance sheet can start selling off immediately in 2017, initially at a modest rate of $10 billion a month, accelerating further at a later date.

But these were the same central bankers who believed their QE and zero bound rate programs would return the US real economy to robust growth by 2010 but didn’t; who maintained the Fed’s massive liquidity injections would attain a 2% goods and services inflation rate, which it still hasn’t; who argued that once unemployment fell to 4.5% (in the US), wage growth and consumption would return to past trends and stimulate the economy, which has yet to occur; and who argued in 2008, also incorrectly, that Fed QE programs providing bankers virtually free money would stimulate bank lending and in turn real investment and growth. The Fed’s latest predictions could prove no more correct about the consequences of further rate hikes and balance sheet reductions than they were about QE, ZIRP, and all the rest for the past eight years.

It’s Not Your Grandpa’s Global Economy

To assume that selling off that magnitude of securities – even if slowly and over extended time – will not have an appreciable impact on nominal interest rates is the kind of assumption that resulted in previous predictive errors circa 2008 since the possible effects on investors’ psychological expectations of more rate hikes and balance sheet selling are completely unknown.
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After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning. What started in 2008 as a massive, somewhat coordinated central bank lender of last resort experiment – i.e. global bank bailout – has over the past eight years evolved into a more or less permanent subsidisation of the private banking and financial systems by central banks. The system has become addicted to free money. And like all addictions, the habit won’t be broken easily. That means central bankers’ plans to raise interest rates in the immediate months ahead will likely “hit a wall” well before the announced rate levels they are projecting. Plans to sell off balance sheets will almost certainly be limited to the US Fed for some time. The ECB and BOE – as well as Bank of Japan and others – will wait and see what the Fed does. The Fed will proceed at a snails pace that will represent little more than mere tokenism, and in the event of further slowing of real GDP growth, or US financial markets correcting in a major way, it will halt selling altogether. In short, there will be little Fed balance sheet reduction before the next recession, and a continued escalation of balance sheets by central banks globally. Central banks will enter the next recession with further bloated balance sheets.

After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning.

The Fed is thus on the verge of another major disastrous monetary policy shift and experiment. It will be unable to raise interest rates as it has announced, by 3 to 4 times a year for the next two years. Nor will it be able to sell off much of its current balance sheet, since anything but token adjustments will accelerate rates even higher. In this writer’s opinion, the federal funds rate cannot be raised above 2%, or the 10 year Treasury yield much above 3%, without precipitating either a serious financial market correction or an abrupt slowing of real economic growth, or both.

What the eight years since the 2008-09 financial crash and great recession reveals is that the major central banks, led by the Fed, have painted themselves in a corner. The massive liquidity provided to their banking systems – engineered by zero rates and QEs – failed even to adequately bail out their banks. Today more than $10 trillion in non-performing bank loans still overhang the major economies, despite the more than $20 trillion added to their central bank balance sheets in just the past eight years.

The fundamental changes in the global economy and radical restructuring of financial, capital and labor markets have severely blunted central banks’ main monetary tool of interest rate management. Just as reduction of rates have little positive effect on stimulating real investment and economic growth, rising rates will have a greater negative impact than anticipated on investment and growth. The Fed and other central banks may soon discover this should they raise rates much faster and further or engage in more than token balance sheet reduction.
Central bankers at the Fed, the BOE and ECB will of course argue the contrary.

They will promise the economy can sustain further significant rate hikes and can commence selling its balance sheet without severe negative consequences. But these are the same people who in 2008 promised rapid and robust recovery from QE and ZIRP programs that didn’t happen. What happened was an unprecedented acceleration in financial asset markets as equity and bond prices surged for eight years, high end real estate prices rose to prior levels, derivatives boomed, gold and crypto-currencies escalated in value, and income inequality soared to record levels – all fueled by the massive $10 trillion central bank liquidity injections that drove interest rates to zero or below. And now they tell us they plan to raise those rates without serious negative effects. Anyone want to buy the Brooklyn bridge? I think they’re also trying to sell that as well.

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression”, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy”, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html.

He hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at jackrasmus.com.

Source

1. For the author’s 2016 analysis of global financial restructuring, Systemic Fragility in the Global Economy, Clarity Press, January 2016. How central banks’ policies are failing is addressed in more detail in the just published book, Central Bankers at the End of Their Ropes: Monetary Policy and the Next Depression, by Jack Rasmus, Clarity Press, July 2017.