How the Economy Was Lost: The War of the Worlds (Counterpunch) (15 page)

Chapter 35: Driving Over the Cliff With the Washington Morons

I
s there intelligent life in Washington, D.C.? Not a speck of
it.

The U.S. economy is imploding, and Obama is being led into a quagmire in Afghanistan that could bring the U.S. into confrontation with Russia and China, American’s largest creditor.

The January, 2009 payroll job figures reveal that last month 20,000 Americans lost their jobs every day.

In addition, December’s job losses were revised up by 53,000 jobs from 524,000 to 577,000. The revision brings the two-month job loss to 1,175,000. If this keeps up, Obama’s promised 3 million new jobs will be wiped out by job losses.

Statistician John Williams reports that this huge number is an understatement. Williams notes that built-in biases in seasonal adjustment factors caused a 118,000 understatement of January job losses, bringing the actual January job loss to 716,000 jobs.

The payroll survey counts the number of jobs, not the number of employed as some people have more than one job. The Household Survey counts the number of people who have jobs. The Household Survey shows that 832,000 people lost their jobs in January and 806,000 in December, for a two month reduction of Americans with jobs of 1,638,000.

The unemployment rate reported in the U.S. media is a fabrication. Williams reports that since the Clinton era, “‘discouraged workers’—those who had given up looking for a job because there were no jobs to be had—were redefined so as to be counted only if they had been ‘discouraged’ for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, (according to the unemployment rate methodology used in 1980) rose to 18 percent in January, from 17.5 percent in December.”

In other words, without all the manipulations of the data, the U.S. unemployment rate in January 2009 is already at depression levels.

How could it be otherwise given the enormous job loss from offshored jobs? It is impossible for a country to create jobs when its corporations are moving production for the American consumer market offshore. When they move the production offshore, they shift U.S. GDP to other countries. The U.S. trade deficit over the past decade has reduced U.S. GDP by $1.5 trillion. That is a lot of jobs.

I have been reporting for years that university graduates have had to take jobs as waitresses and bartenders. As over-indebted consumers lose their jobs, they will visit restaurants and bars less frequently. Consequently, those with university degrees will not even have jobs waiting on tables and mixing drinks.

U.S. policymakers have ignored the fact that consumer demand in the 21st century has been driven, not by increases in real income, but by increased consumer indebtedness. This fact makes it pointless to try to stimulate the economy by bailing out banks so that they can lend more to consumers. The American consumers have no more capacity to borrow.

With the decline in the values of their principal assets—their homes—with the destruction of half of their pension assets, and with joblessness facing them, Americans cannot and will not spend.

Why bail out GM, Citibank, and the rest when the firms are worsening U.S. unemployment by moving as many operations offshore as they possibly can?

Much of U.S. infrastructure is in poor shape and needs renewing. However, infrastructure jobs do not produce goods and services that can be sold abroad. Obama’s stimulus commitment to infrastructure does nothing to help the U.S. reduce its huge trade deficit, the financing of which is becoming a major problem. Moreover, when the infrastructure projects are completed, so are the jobs.

At best, assuming Mexican immigrants do not get most of the construction jobs, all Obama’s stimulus program can do is to reduce the number of unemployed temporarily.

Unless U.S. corporations can be required to use American labor to produce the goods and services that they sell in American markets, there is no hope for the U.S. economy. No one in the Obama administration has the wits to address this problem. Thus, the economy will continue to implode.

Adding to the brewing disaster, Obama has been deceived by his military and neoconservative advisers into expanding the war in Afghanistan. Obama intends to use the draw-down of U.S. soldiers in Iraq to send 30,000 more American troops to Afghanistan. This would bring the U.S. forces to 60,000—600,000 fewer than U.S. Marine Corps and U.S. Army counterinsurgency guidelines define as the minimum number of soldiers necessary to bring success in Afghanistan.

In Iraq, the Iranian government had to bail out the Bush regime by restraining its Shi’ite allies and encouraging them to use the ballot box to attain power and push out the Americans. In Iraq the U.S. troops only had to fight a small Sunni insurgency drawn from a minority of the population. Even so, the U.S. “prevailed” by putting the insurgents on the U.S. payroll and paying them not to fight. The withdrawal agreement was dictated by the Shi’ites. It was not what the Bush regime wanted.

One would think that the experience with the “cakewalk” in Iraq would make the U.S. hesitant to attempt to occupy Afghanistan, an undertaking that would require the U.S. to occupy parts of Pakistan. The U.S. was hard pressed to maintain 150,000 troops in Iraq. Where is Obama going to get another half million soldiers to add to the 150,000 to pacify Afghanistan?

One answer is the rapidly growing massive U.S. unemployment. Americans will sign up to go kill abroad rather than be homeless and hungry at home.

But this solves only half of the problem. Where does the money come from to support an army in the field of 650,000, an army 4.3 times larger than U.S. forces in Iraq, a war that has cost us $3 trillion in out-of-pocket and already-incurred future costs. This money would have to be raised in addition to the $2 trillion U.S. budget deficit that is the result of Bush’s financial sector bailout, Obama’s stimulus package, and the rapidly failing economy. When economies tank, as the American one is doing, tax revenues collapse. The millions of unemployed Americans are not paying Social Security, Medicare, and income taxes. The stores and businesses that are closing are not paying federal and state income taxes. Consumers with no money or credit to spend are not paying sales taxes.

The Washington Morons, and morons they are, have given no thought as to how they are going to finance fiscal year 2009 and fiscal year 2010 budget deficits, each of which is four times larger than the 2008 deficit.

The practically nonexistent U.S. saving rate cannot finance it.

The trade surpluses of our trading partners, such as China, Japan, and Saudi Arabia, cannot finance it.

The U.S. government really has only two possibilities for financing such stupendous budget deficits. One is a second collapse in the stock market, which would drive the surviving investors with what they have left into “safe” U.S. Treasury bonds. The other is for the Federal Reserve to monetize the Treasury debt.

Monetizing the debt means that when no one is willing or able to purchase the Treasury’s bonds, the Federal Reserve buys them by creating bank deposits for the Treasury’s account.

In other words, the Fed “prints money” with which to buy the Treasury’s bonds. The Treasury pays the U.S. government’s bills by writing checks against the printed money.

Once this happens, the U.S. dollar will cease to be the reserve currency.

China, Japan, and Saudi Arabia, countries that hold enormous quantities of U.S. Treasury debt in addition to other U.S. dollar assets, will sell, hoping to get out before others.

The value of the U.S. dollar will collapse and become the currency of a banana republic.

The U.S. will not be able to pay for its imports, a serious problem for a country dependent on imports for its energy, manufactured goods, and advanced technology products.

Obama’s Keynesian advisers have learned with a vengeance Milton Friedman’s lesson that the Great Depression resulted from the Federal Reserve permitting a contraction of the supply of money and credit. In the Great Depression good debts were destroyed by monetary contraction. Today bad debts are being preserved by the expansion of bank reserves, and the U.S. Treasury is jeopardizing its credit standing and the dollar’s reserve currency status with enormous quarterly bond auctions as far as the eye can see.

Meanwhile, the Russians, overflowing with energy and mineral resources, and not in debt, have learned that the U.S. government is not to be trusted. Russia has watched Reagan’s successors attempt to turn former constituent parts of the Soviet Union into U.S. puppet states with U.S. military bases. The U.S. is trying to ring Russia with missiles that neutralize Russia’s strategic deterrent.

Putin has caught on to “comrade wolf.” To stop America’s meddling in Russia’s sphere of influence, the Russian government has created a collective security treaty organization comprised of Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. Uzbekistan is a partial participant.

To whose agenda is President Obama being hitched? Writing in the English language version of the Swiss newspaper,
Zeit-Fragen
, Stephen J. Sniegoski reports that leading figures of the neocon conspiracy—Richard Perle, Max Boot, David Brooks, and Mona Charen—are ecstatic over Obama’s appointments. They don’t see any difference between Obama and Bush/Cheney.

Not only are Obama’s appointments moving him into an expanded war in Afghanistan, but the powerful Israel Lobby is pushing Obama toward a war with Iran.

The unreality in which he U.S. government operates is beyond belief. A bankrupt government that cannot pay its bills without printing money is rushing headlong into wars in Afghanistan, Pakistan, and Iran. According to the Center for Strategic and Budgetary Analysis, the cost to the U.S. taxpayers of sending a single soldier to fight in Afghanistan or Iraq is $775,000 per year!

Obama’s war in Afghanistan is the Mad Hatter’s Tea Party. After seven years of conflict, there is still no defined mission or endgame scenario for U.S. forces in Afghanistan. When asked about the mission, a U.S. military official told NBC News, “Frankly, we don’t have one.” NBC reports: “They’re working on it.” 

Speaking to House Democrats on February 5, President Obama admitted that the U.S. government does not know what its mission is in Afghanistan and that to avoid “mission creep without clear parameters,” the U.S. “needs a clear mission.”

How would you like to be sent to a war, the point of which no one knows, including the commander-in-chief who sent you to kill or be killed? How, fellow taxpayers, do you like paying the enormous cost of sending soldiers on an undefined mission while the economy collapses and your job disappears?

February 9, 2009

Chapter 36: When Things Fall Apart

O
n March 19, 2009, the
New York Times
reported: “The
Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months.”

The Federal Reserve says that its additional purchase of more than $1 trillion in existing bonds is part of its plan to revive the economy. Another way to view the Fed’s announcement is to see it as a preemptive rescue. Is the Fed rescuing banks from their bond portfolios prior to the destruction of bond prices by inflation?

The answer to this question lies in the answer to the question of how the unprecedented sizes of the FY 2009 and FY 2010 federal budget deficits will be financed. Neither the U.S. savings rate nor the trade surpluses of our major foreign lenders are sufficient.

I know of only two ways of financing the looming monster deficits. One, courtesy of Pam Martens, is that the federal deficits could be financed by further flight from equities and other investments.

This is a possibility. If the mortgage-backed security problem is real and not contrived, the next shock should arise from commercial real estate. Stores are closing in shopping centers, and vacancies are rising in office buildings. Without rents, the mortgages can’t be paid.

Another scare and another big drop in the stock market will set off a second “flight to quality” and finance the budget deficits.

The other way is to print money. John Williams (shadowstats.com) thinks that the budget deficits will be financed by monetizing debt. Debt monetization happens when the Federal Reserve buys newly issued U.S. Treasury bonds and pays for the purchase by creating demand deposits for the Treasury. The money supply grows by the amount of Fed purchases of new Treasury debt, which is the same as printing money. Printing money to finance the government’s budget normally leads to high inflation and high interest rates.

The initial impact of the announcement of the Fed’s plan to purchase existing debt was to drive up bond prices. However, if the reserves poured into the banking system by the bond purchases result in new money growth, and if the Fed purchases the new debt issues to finance the governments’ budget deficits, the outlook for bond prices and the dollar becomes poor.

It will be interesting to see how the currency markets view the problem. The
New York Times
reported that “the dollar plunged about 3 percent against other major currencies” in response to the Fed’s announcement.

If the exchange value of the dollar works its way down, it will complicate the financing of the trade deficit and impact the decisions of foreigners who hold large stocks of U.S. dollar debt. The premier of China recently expressed his concern about the safety of his country’s large investment in U.S. dollar debt.

If the U.S. government is forced to print money to cover the high costs of its wars and bailouts, things could fall apart very quickly.

March 23, 2009

Chapter 37: How the Economy was Lost

T
he American economy has gone away. It is not coming back
until free trade myths are buried six feet under.

America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the Union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the U.S. dollar took the role as reserve currency, a privilege that allows the U.S. to pay its international bills in its own currency.

World War II and socialism together ensured that the U.S. economy dominated the world at the mid-20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism.

The ascendant position of the U.S. economy caused the U.S. government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America’s cold war and foreign policies. For example, Turkey’s U.S. textile quotas were increased in exchange for over-flight rights in the Gulf War, making lost U.S. textile jobs an off-budget war expense.

In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the “free market” Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.

Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington, D.C. aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.

Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.

This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other First World corporations discovered that a massive supply of foreign labor was available at practically free wages.

To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

“Free market economists” covered up the damage done to the U.S. economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.

The American corporations quickly learned that by declaring “shortages” of skilled Americans, they could get from Congress H-1B work visas for lower paid foreigners with whom to replace their American work force. Many U.S. corporations are known for forcing their U.S. employees to train their foreign replacements in exchange for severance pay.

Chasing after shareholder return and “performance bonuses,” U.S. corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the U.S. trade deficit has exploded to unimaginable heights, calling into question the U.S. dollar as reserve currency and America’s ability to finance its trade and budget deficits.

As the American economy eroded away bit by bit, “free market” ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these “old economy” jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the “service economy” of software and communications would provide a leg up for the work force.

Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.

The “free market” economists, who provided the propaganda and disinformation that hid the act of destroying the U.S. economy, were well paid. As
Business Week
noted, “outsourcing’s inner circle has deep roots in General Electric and McKinsey,” a consulting firm. Indeed, one of McKinsey’s main apologists for offshoring of U.S. jobs, Diane Farrell, is now a member of Obama’s White House National Economic Council.

The pressure on U.S. employment from jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive “performance” bonuses for moving American jobs offshore or giving them to H-1B work visa holders.

Lowly paid offshored employees, together with H-1B visas, have curtailed employment for new American graduates and for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job and providing a good service have ceased to be grounds for employment in corporations that no longer have any loyalty to employees. Instead, the goal is to minimize labor costs at all cost in order to please Wall Street and shareholders. In this way U.S. corporations become the benefactors of foreigners.

“Free trade” has destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart where they are paid the minimum wage and no benefits.

I have read endless tributes to Wal-Mart from “libertarian economists,” who sing Wal-Mart’s praises for bringing low price goods, 70 percent of which are made in China, to the American consumer. What these “economists” do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of U.S. assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.

The demise of America’s productive economy left the U.S. economy dependent on finance, in which the U.S. remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized and sold.

Individual mortgage debts were combined into a “security.” The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.

In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and on firms. They bought and sold collateral debt obligations and credit default swaps. A buyer pays a premium to a seller for a swap to guarantee an asset’s value. If an asset “insured” by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.

The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.

This was the most shameful and most mindless form of speculation. Gamblers were betting hands that could not be covered. The U.S. regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.

The U.S. government should never have used billions of taxpayers’ dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of “troubled” assets that threaten financial markets.

The billions of taxpayers’ dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.

Taxpayers, equity owners, and the credit standing of the U.S. government are being ruined by financial shysters who are manipulating to their own advantage the government’s commitments to mark-to-market and the “sanctity of contracts.” Multi-trillion dollar “bailouts” and bank nationalization are the result of the U.S. government’s inability to respond intelligently.

Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.

The Uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to rip-off American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous trade. In other words, speculators could not make money at others’ expense by ganging up on a stock and short-selling it trade after trade.

As a former Treasury official, I am amazed that the U.S. government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the Uptick rule is reinstated.

The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners, and pension funds to financial manipulators.

The Bush and Obama plans total $1.6 trillion, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the U.S. dollar, its role as reserve currency, the ability of the U.S. government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.

If we add to my simple menu of remedies a ban against short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals, and, perhaps, wars.

According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism’s purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street’s greed endangering all the economies of the world. The greed of Wall Street and the negligence of the U.S. government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox “News,” presented a program that predicted riots and disarray in the United States by 2014.

How long will Americans permit “their” government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a worse catastrophe.

If truth be known, the “banking problem” is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1B visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.

The other serious problem is the status of the U.S. dollar as reserve currency. This status has allowed the U.S., now a country heavily dependent on imports just like a Third World or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.

If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.