When are America’s global corporations and Wall Street going to
sit down with President Trump and explain to him that his trade war is not with
China but with them? The
biggest chunk of America’s trade deficit with China is the offshored production
of America’s global corporations. When the corporations bring the products that
they produce in China to the US consumer market, the products are classified as
imports from China.
Six years
ago when I was writing The
Failure of Laissez Faire Capitalism, I concluded on the evidence
that half of US imports from China consist of the offshored production of US
corporations. Offshoring is a substantial benefit to US corporations because of
much lower labor and compliance costs. Profits, executive bonuses, and shareholders’
capital gains receive a large boost from offshoring. The costs of these
benefits for a few fall on the many—the former American employees who formerly
had a middle class income and expectations for their children.
In my
book, I cited evidence that during the first decade of the 21st century “the US
lost 54,621 factories, and manufacturing employment fell by 5 million
employees. Over the decade, the number of larger factories (those employing
1,000 or more employees) declined by 40 percent. US factories employing
500-1,000 workers declined by 44 percent; those employing between 250-500
workers declined by 37 percent, and those employing between 100-250 workers
shrunk by 30 percent. These losses are net of new start-ups. Not all the losses
are due to offshoring. Some are the result of business failures” (p. 100).
In other words, to put it in the most
simple and clear terms, millions of Americans lost their middle class jobs not
because China played unfairly, but because American corporations betrayed the American
people and exported their jobs. “Making
America great again” means dealing with these corporations, not with China. When
Trump learns this, assuming anyone will tell him, will he back off China and
take on the American global corporations?
The loss
of middle class jobs has had a dire effect on the hopes and expectations of
Americans, on the American economy, on the finances of cities and states and,
thereby, on their ability to meet pension obligations and provide public
services, and on the tax base for Social Security and Medicare, thus
threatening these important elements of the American consensus. In short, the
greedy corporate elite have benefitted themselves at enormous cost to the
American people and to the economic and social stability of the United States.
The job
loss from offshoring also has had a huge and dire impact on Federal Reserve
policy. With the decline in income growth, the US economy stalled. The Federal
Reserve under Alan Greenspan substituted an expansion in consumer credit for the
missing growth in consumer income in order to maintain aggregate consumer
demand. Instead of wage increases, Greenspan relied on an increase in consumer
debt to fuel the economy.
The credit
expansion and consequent rise in real estate prices, together with the
deregulation of the banking system, especially the repeal of the Glass-Steagall
Act, produced the real estate bubble and the fraud and mortgage-backed
derivatives that gave us the 2007-08 financial crash.
The Federal
Reserve responded to the crash not by bailing out consumer debt but by bailing
out the debt of its only constituency—the big banks. The Federal Reserve
let little banks fail and be bought up by the big ones, thus further increasing
financial concentration. The multi-trillion dollar increase in the Federal
Reserve’s balance sheet was entirely for the benefit of a handful of large
banks. Never before in history had an agency of the US government acted so
decisively in behalf only of the ownership class.
The way
the Federal Reserve saved the irresponsible large banks, which should have
failed and have been broken up, was to raise the prices of troubled assets on
the banks’ books by lowering interest rates. To be clear, interest rates and
bond prices move in opposite directions. When interest rates are lowered by the
Federal Reserve, which it achieves by purchasing debt instruments, the prices
of bonds rise. As the various debt risks move together, lower interest rates
raise the prices of all debt instruments, even troubled ones. Raising the prices
of debt instruments produced solvent balance sheets for the big banks.
To
achieve its aim, the Federal Reserve had to lower the interest rates to zero,
which even the low reported inflation reduced to negative interest rates. These
low rates had disastrous consequences. On the one hand low interest rates
caused all sorts of speculations. On the other low interest rates deprived
retirees of interest income on their retirement savings, forcing them to draw
down capital, thus reducing accumulated wealth among the 90 percent. The
under-reported inflation rate also denied retirees Social Security
cost-of-living adjustments, forcing them to spend retirement capital.
The low
interest rates also encouraged corporate boards to borrow money in order to buy
back the corporation’s stock, thus raising its price and, thereby, the bonuses
and stock options of executives and board members and the capital gains of
shareholders. In other words, corporations indebted themselves for the
short-term benefit of executives and owners. Companies that refused to
participate in this scam were threatened by Wall Street with takeovers.
Consequently
today the combination of offshoring and Federal Reserve policy has left us a
situation in which every aspect of the economy is indebted—consumers,
government at all levels, and businesses. A recent Federal Reserve study
concluded that Americans are so indebted and so poor that 41 percent of the
American population cannot raise $400 without borrowing from family and friends
or selling personal possessions.
A country
whose population is this indebted has no consumer market. Without a consumer
market there is no economic growth, other than the false orchestrated figures
produced by the US government by under counting the inflation rate and the
unemployment rate.
Without
economic growth, consumers, businesses, state, local, and federal governments
cannot service their debts and meet their obligations.
The
Federal Reserve has learned that it can keep afloat the Ponzi scheme that is
the US economy by printing money with which to support financial asset prices.
The alleged rises in interest rates by the Federal Reserve are not real
interest rates rises. Even the under-reported inflation rate is higher than the
interest rate increases, with the result that the real interest rate falls.
It is no
secret that the Federal Reserve controls the price of bonds by openly buying
and selling US Treasuries. Since 1987 the Federal Reserve can also support the
price of US equities. If the stock market tries to sell off, before much damage
can be done the Federal Reserve steps in and purchases S&P futures, thus
driving up stock prices. In recent years, when corrections begin they are
quickly interrupted and the fall is arrested.
As a
member of the Plunge Protection Team known officially as the Working Group on
Financial Markets, the Federal Reserve has an open mandate to prevent another
1987 “Black Monday.” In my opinion, the Federal Reserve would interpret this
mandate as authority to directly intervene. However, just as the Fed can use
the big banks as agents for its control over the price of gold, it can use the
Wall Street banks dark pools to manipulate the equity markets. In this way the
manipulation can be disguised as banks making trades for clients. The Plunge
Protection Team consists of the Federal Reserve, the Treasury, the SEC, and the
Commodity Futures Trading Corporation. As Washington’s international power
comes from the US dollar as world reserve currency, protecting the value of the
dollar is essential to American power. Foreign inflows into US equities are
part of the dollar’s strength. Thus, the Plunge Protection Team seeks to
prevent a market crash that would cause flight from US dollar assets.
Normally
so much money creation by the Federal Reserve, especially in conjunction with
such a high debt level of the US government and also state and local
governments, consumers, and businesses, would cause a falling US dollar
exchange rate. Why hasn’t this happened?
For three
reasons. One is that the central banks of the other three reserve
currencies—the Japanese central bank, the European central bank, and the Bank
of England—also print money. Their Quantitative Easing, which still continues,
offsets the dollars created by the Federal Reserve and keeps the US dollar from
depreciating.
A second
reason is that when suspicion of the dollar’s worth sends up the gold price,
the Federal Reserve or its bullion banks short gold futures with naked
contracts. This drives down the gold price. There are numerous columns on my
website by myself and Dave Kranzler proving this to be the case. There is no
doubt about it.
The third
reason is that money managers, individuals, pension funds, everyone and all the
rest had rather make money than not. Therefore, they go along with the Ponzi
scheme. The people who did not benefit from the Ponzi scheme of the past decade
are those who understood it was a Ponzi scheme but did not realize the
corruption that has beset the Federal Reserve and the central bank’s ability
and willingness to continue to feed the Ponzi scheme.
As I have
explained previously, the Ponzi scheme falls apart when it becomes impossible
to continue to support the dollar as burdened as the dollar is by debt levels
and abundance of dollars that could be dumped on the exchange markets.
This is
why Washington is determined to retain its hegemony. It is Washington’s
hegemony over Japan, Europe, and the UK that protects the American Ponzi
scheme. The moment one of these central banks ceases to support the dollar, the
others would follow, and the Ponzi scheme would unravel. If the prices of US
debt and stocks were reduced to their real values, the United States would no
longer have a place in the ranks of world powers.
The
implication is that war, and not economic reform, is America’s most likely
future.
In a
subsequent column I hope to explain why neither US political party has the
awareness and capability to deal with real problems.
