High debt levels mean no consumer spending, no growth and falling tax revenue for paying off debt or funding social services, pensions, health care, education. Welcome to austerity. Notice that all important policies are introduced to maximise corporate profits, drive down wages and decrease tax revenue. This is clearly a war by the wealthy to increase their wealth at our expense. Many decades ago this was called Class War.
IN THE BEGINNING
When China “opened up” to the West many US and Australian corporations moved their manufacturing and other jobs offshore. Offshoring to China or other countries is a substantial benefit to these 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 employees who formerly had a middle class income and expectations for their children.
CORPORATIONS WIN, EVERYONE ELSE LOSES
The loss of middle class jobs has had a dire effect on the US and Australia economies. Because the incomes of ordinary people fell, this meant that states and the Federal governments received less in taxes, so it became harder for them to meet pension obligations and provide public services. For the same reason the tax receipts which pay for Social Security, Centrelink payments and Medicare also fell.
FALLING INCOMES ARE REPLACED BY INCREASED CONSUMER DEBT
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. The Reserve Bank of Australia has followed the same path here.
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 result in Australia has been an increase in loans for houses and a significant rise in the cost of housing in the major cities. Since incomes are static or falling, fewer people can afford to buy houses, and some working people cannot even afford the higher rental costs.
US GOVERNMENT SAVES THE BANKS, NOT THE PEOPLE IN DEBT
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.
BANKS SAVED BY LOWERING INTEREST RATES TO ZERO
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. In the end, the Federal Reserve had to lower the interest rates to zero, which even the low reported inflation reduced to negative interest rates.
LOW INTEREST RATES FACILITATES SPECULATION AND REMOVES RETURNS ON RETIREMENT SAVINGS
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.
LOW INTEREST RATES INCREASE WEALTH OF EXECUTIVES AND SHAREHOLDERS
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.
RESULT: DEBT AS FAR AS THE EYE CAN SEE
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.
MASSIVE DEBT MEANS NO CONSUMER SPENDING, NO GROWTH, FALLING TAX REVENUE
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.
SOLUTION: PRINT MORE MONEY AND KEEP ASSET PRICES HIGH
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.
THREE REASONS WHY THE US DOLLAR DOES NOT FALL IN VALUE WITH RESPECT TO OTHER CURRENCIES
There are 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. 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.
HOW WILL IT END? WHEN THE US DOLLAR IS NO LONGER THE WORLD RESERVE CURRENCY
A Ponzi scheme like this 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. Notice that the other three reserve currencies are completely under the political control of the US.
COULD THE US DOLLAR BE REPLACED AS A RESERVE CURRENCY?
There is some movement in the EU away from the US policies. Some leaders are talking of closer economic ties with Russia and China. At the same time Russia and China are increasing their holdings of gold and selling off their US Treasury bonds. If these continue it is possible that a mix of the ruble, the yuan, the Euro and gold could replace the US dollar for international trade.
THE US ANSWER TO THIS CHALLENGE: POLITICAL AND MILITARY PRESSURE
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.
WILL THE US ALLOW THEIR PONZI SCHEME TO COLLAPSE WITHOUT A FIGHT?
Only time will tell.
About the Author:
Paul Craig Roberts served as United States Assistant Secretary of the Treasury for Economic Policy under President Reagan in 1981. Later he was editor and columnist for The Wall Street Journal and other US publications. Then he was appointed professor of economics at George Mason University and held the inaugural William E. Simon Chair in Political Economy at Georgetown University.
How Long Can The Federal Reserve Stave Off the Inevitable?