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

by Roberts, Paul Craig

  The rest of America is suffering terribly.

  The reported unemployment rate does not include jobless Americans who have been unemployed for more than a year and have given up on finding work. As each month passes, unemployed Americans drop off the unemployment role due to nothing except the passing of time.

  The inflation rate, especially “core inflation,” is another fiction. “Core inflation” does not include food and energy, two of Americans’ biggest budget items. The Consumer Price Index (CPI) assumes, ever since the Boskin Commission during the Clinton administration, that if prices of items go up consumers substitute cheaper items. This is certainly the case, but this way of measuring inflation means that the CPI is no longer comparable to past years, because the basket of goods in the index is variable.

  The Boskin Commission’s CPI, by lowering the measured rate of inflation, raises the real GDP growth rate. The result of the statistical manipulation is an understated inflation rate, thus eroding the real value of Social Security income, and an overstated growth rate. Statistical manipulation cloaks a declining standard of living.

  In bygone days of American prosperity, American incomes rose with productivity. It was the real growth in American incomes that propelled the U.S. economy.

  In today’s America, the only incomes that rise are in the financial sector that risks the country’s future on excessive leverage and in the corporate world that substitutes foreign for American labor. Under the compensation rules and emphasis on shareholder earnings that hold sway in the U.S. today, corporate executives maximize earnings and their compensation by minimizing the employment of Americans.

  Try to find some acknowledgement of this in the “mainstream media,” or among economists, who suck up to the offshoring corporations for grants.

  The worst part of the decline is yet to come. Bank failures and home foreclosures are yet to peak. The commercial real estate bust is yet to hit. The dollar crisis is building. When it hits, interest rates will rise dramatically as the U.S. struggles to finance its massive budget and trade deficits while the rest of the world tries to escape a depreciating dollar.

  Since the spring of 2009, the value of the U.S. dollar has collapsed against every currency except those pegged to it. The Swiss franc has risen 14 percent against the dollar. Every hard currency from the Canadian dollar to the Euro and U.K. pound has risen at least 13 percent against the U.S. dollar since April 2009. The Japanese yen is not far behind, and the Brazilian real has risen 25 percent against the almighty U.S. dollar. Even the Russian ruble has risen 13 percent against the U.S. dollar.

  What sort of recovery is it when the safest investment is to bet against the U.S. dollar?

  The American household of my day, in which the husband worked and the wife provided household services and raised the children, scarcely exists today. Most, if not all, members of a household have to work in order to pay the bills. However, the jobs are disappearing, even the part-time ones.

  If measured according to the methodology used when I was Assistant Secretary of the Treasury, the unemployment rate today in the U.S. is 21.4 percent. Moreover, there is no obvious way of reducing it. There are no factories, with work forces temporarily laid off by high interest rates, waiting for a lower interest rate policy to call their workforces back into production.

  The work has been moved abroad. In the bygone days of American prosperity, CEOs were inculcated with the view that they had equal responsibilities to customers, employees, and shareholders. This view has been exterminated. Pushed by Wall Street and the threat of takeovers promising “enhanced shareholder value,” and incentivized by “performance pay,” CEOs use every means to substitute cheaper foreign employees for Americans. Despite 20 percent unemployment and cum laude engineering graduates who cannot find jobs or even job interviews, Congress continues to support 65,000 annual H-1B work visas for foreigners.

  In the midst of the highest unemployment since the Great Depression what kind of a fool do you need to be to think that there is a shortage of qualified U.S. workers?

  September 23, 2009

  Chapter 39: As the Dollar Sinks—A Perfect Storm

  Economic news remains focused on banks and housing, while the threat mounts to the U.S. dollar from massive federal budget deficits in fiscal years 2009 and 2010.

  Earlier this year the dollar’s exchange value rose against currencies, such as the euro, U.K. pound, and Swiss franc, against which the dollar had been steadily falling. The dollar’s rise made U.S. policymakers complacent, even though the rise was due to flight from over-leveraged financial instruments and falling stock markets into “safe” Treasuries. Since April, however, the dollar has steadily declined as investors and foreign central banks realize that the massive federal budget deficits are likely to be monetized.

  What happens to the dollar will be the key driver of what lies ahead. The likely scenario could be nasty.

  America’s trading partners do not have large enough trade surpluses to finance a federal budget deficit swollen to $2 trillion by gratuitous wars, recession, bailouts, and stimulus programs. Moreover, concern over the dollar’s future is causing America’s foreign creditors to seek alternatives to U.S. debt in which to hold their foreign reserves.

  According to a recent report in the online edition of Pravda, Russia’s central bank now holds a larger proportion of its reserves in euros than in U.S. dollars. On May 18 the Financial Times reported that China and Brazil are considering bypassing the dollar and conducting their mutual trade in their own currencies. Other reports say that China has increased its gold reserves by 75 percent in recent years.

  China’s premier, Wen Jiabao, has publicly expressed his concern about the future of the dollar. Arrogant, hubris-filled American officials and their yes-men economists discount Chinese warnings, arguing that the Chinese have no choice but to support the dollar by purchasing Washington’s red ink. Otherwise, they say, China stands to lose the value of its large dollar portfolio.

  China sees it differently. It is obvious to Chinese officials that neither China nor the entire world has enough spare money to purchase $3 trillion or more of U.S. Treasuries over the next two years. According to the London Telegraph on May 27, Dallas Federal Reserve Bank president Richard Fisher was repeatedly grilled by senior officials of the Chinese government during his recent visit about whether the Federal Reserve was going to finance the U.S. budget deficit by printing money. According to Fisher, “I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States.”

  U.S. Treasury Secretary Timothy Geithner has gone to China to calm the fears. However, even before he arrived, a Chinese central bank spokesman gave Geithner the message that the U.S. should not assume China will continue to finance Washington’s extravagant budgets. The governor of China’s central bank is calling for the abandonment of the dollar as reserve currency, suggesting the use of the International Monetary Fund’s Special Drawing Rights in its place.

  President Lyndon Johnson’s “guns and butter” policy during the 1960s forced president Richard Nixon to eliminate the gold backing that the dollar had as world reserve currency, putting foreign central banks on the same fiat money standard as the U.S. economy. In its first four months, the Obama administration has outdone president Johnson. Instead of ending war, Obama has expanded America’s war of aggression in Afghanistan and spread it into Pakistan. War, bailouts, and stimulus plans have pushed the government’s annual operating budget 50 percent into the red.

  Washington’s financial irresponsibility has brought pressure on the dollar and the U.S. bond market. Federal Reserve Chairman Bernanke thought he could push down interest rates on Treasuries by purchasing $300 billion of them. However, the result was a drop (after a short-lived initial
rise) in Treasury prices and a rise in interest rates.

  As monetization of federal debt goes forward, U.S. interest rates will continue to rise, worsening the problems in the real estate sector. The dollar will continue to lose value, making it harder for the U.S. to finance its budget and trade deficits. Domestic inflation will raise its ugly head despite high unemployment.

  The incompetents who manage U.S. economic policy have created a perfect storm.

  The Obama-Federal Reserve-Wall Street plan for the U.S. to spend its way out of its problems is coming unglued. The reckless spending is pushing the dollar down and interest rates up.

  Every sector of the U.S. economy is in trouble. Former U.S. manufacturing firms have been turned into marketing companies trying to sell their foreign-made goods to domestic consumers who have seen their jobs moved offshore. Much of what is left of U.S. manufacturing—the auto industry—is in bankruptcy. More decline awaits housing and commercial real estate. The dollar is sliding, and interest rates are rising, despite the Federal Reserve’s attempts to hold interest rates down.

  When the Reagan administration cured stagflation, the result was a secular bull-market in U.S. Treasuries that lasted 28 years. That bull market is over. Americans’ living standards are headed down. The American standard of living has been destroyed by wars, by offshoring of jobs, by financial deregulation, by trillion dollar handouts to financial gangsters who have, so far, destroyed half of Americans’ retirement savings, and by the monetization of debt.

  The next shoe to drop will be the dollar’s loss of the reserve currency role. Then the U.S., an import-dependent country, will no longer be able to pay for its imports. Shortages will worsen price inflation and disrupt deliveries.

  Life for most Americans will become truly stressful.

  June 3, 2009

  Chapter 40: What Economy?

  There is no economy left to recover. The U.S. manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.”

  The “New Economy” was based on services. Its artificial life was fed by the Federal Reserve’s artificially low interest rates, which produced a real estate bubble, and by “free market” financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

  The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans’ wealth in their real estate, pensions, and savings collapsed dramatically while their jobs disappeared.

  The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.

  And now suddenly Americans can’t borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America’s consumer economy, approximately 70 percent of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities and in their cars.

  Meanwhile the U.S. government’s budget deficit has jumped from $455 billion in 2008 to $1.42 trillion this year, with another $1,500 billion on the books for 2010. And President Obama has intensified America’s expensive war of aggression in Afghanistan and initiated a new war in Pakistan.

  There is no way for these deficits to be financed except by printing money or by further collapse in stock markets that would drive people out of equity into bonds.

  The U.S. government’s budget is 50 percent in the red. That means half of every dollar the federal government spends must be borrowed or printed. Because of the worldwide debacle caused by Wall Street’s financial gangsterism, the world needs its own money and hasn’t $1.5 trillion annually to lend to Washington.

  As dollars are printed, the growing supply adds to the pressure on the dollar’s role as reserve currency. Already America’s largest creditor, China, is admonishing Washington to protect China’s investment in U.S. debt and lobbying for a new reserve currency to replace the dollar before it collapses. According to various reports, China is spending down its holdings of U.S. dollars by acquiring gold and stocks of raw materials and energy.

  The price of one ounce of gold coins is $1,000 despite efforts of the U.S. government to hold down the gold price. How high will this price jump when the rest of the world decides that the bankruptcy of “the world’s only superpower” is at hand?

  And what will happen to America’s ability to import not only oil, but also the manufactured goods on which it is import-dependent?

  When the over-supplied U.S. dollar loses the reserve currency role, the U.S. will no longer be able to pay for its massive imports of real goods and services with pieces of paper. Overnight, shortages will appear and Americans will be poorer.

  Nothing in Presidents Bush and Obama’s economic policy addresses the real issues. Instead, Goldman Sachs was bailed out, more than once. As Eliot Spitzer said, the banks made a “bloody fortune” with U.S. aid.

  It was not the millions of now homeless homeowners who were bailed out. It was not the scant remains of American manufacturers that were bailed out. It was the Wall Street banks.

  According to Bloomberg.com, Goldman Sachs’ current record earnings from their free or low cost capital supplied by broke American taxpayers has led the firm to decide to boost compensation and benefits by 33 percent. On an annual basis, this comes to compensation of $773,000 per employee.

  This should tell even the most dimwitted patriot who “their” government represents.

  The worst of the economic crisis has not yet hit. I don’t mean the rest of the real estate crisis that is waiting in the wings. Home prices will fall further when the foreclosed properties currently held off the market are dumped. Store and office closings are adversely impacting the ability of owners of shopping malls and office buildings to make their mortgage payments. Commercial real estate loans were also securitized and turned into derivatives.

  The real crisis awaits us. It is the crisis of high unemployment, of stagnant and declining real wages confronted with rising prices from the printing of money to pay the government’s bills and from the dollar’s loss of exchange value.

  Retirees dependent on state pension systems, which cannot print money, might not be paid, or might be paid with IOUs. They will not even have depreciating money with which to try to pay their bills. Desperate tax authorities will squeeze the remaining life out of the middle class.

  Nothing in Obama’s economic policy is directed at saving the U.S. dollar as reserve currency or the livelihoods of the American people. Obama’s policy, like Bush’s before him, is keyed to the enrichment of Goldman Sachs and the armament industries.

  Matt Taibbi describes Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Look at the Goldman Sachs representatives in the Clinton, Bush, and Obama administrations. This bankster firm controls the economic policy of the United States.

  Little wonder that Goldman Sachs has record earnings while the rest of us grow poorer by the day.

  July 16, 2009

  Chapter 41: The Expiring Economy

  Tent cities springing up all over America are filling with the homeless unemployed from the worst economy since the 1930s. While Americans live in tents, the Obama government has embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan, to rival the one the Bush government built in Baghdad, Iraq.

  Hard times have now afflicted Americans for so long that even the extension of unemployment benefits from 6 months to 18 months for 24 high unemployment states, and to 46–72 weeks in other states, is beginning to run out. By Christmas 2009, 1.5 million Americans will have e
xhausted unemployment benefits while unemployment rolls continue to rise.

  Amidst this worsening economic crisis, the House of Representatives just passed a $636 billion “defense” bill.

  Who is the United States defending against? Americans have no enemies except those that the U.S. government goes out of its way to create by bombing and invading countries that comprise no threat whatsoever to the U.S. and by encircling others—Russia for example—with threatening military bases.

  America’s wars are contrived affairs to serve the money laundering machine: from the taxpayers and money borrowed from foreign creditors to the armaments industry to the political contributions that ensure $636 billion “defense” bills.

  President George W. Bush gave us wars in Iraq and Afghanistan that are entirely based on lies and misrepresentations. But Obama has done Bush one better. Obama has started a war in Pakistan with no explanation whatsoever.

  If the armaments industry and the neoconservative brownshirts have their way, the U.S. will also be at war with Iran, Russia, Sudan, and North Korea.

  Meanwhile, America continues to be overrun, as it has been for decades, not by armed foreign enemies but by illegal immigrants across America’s porous and undefended borders.

  It is more proof of the Orwellian time in which we live that $636 billion appropriated for wars of aggression is called a “defense bill.”

  Who is going to pay for all of this? When foreign countries have spent their trade surpluses and have no more dollars to recycle into the purchase of Treasury bonds, when U.S. banks have used up their “bailout” money by purchasing Treasury bonds, and when the Federal Reserve cannot print any more money to keep the government going without pushing up inflation and interest rates, the taxpayer will be all that is left. Already Obama’s two top economic advisors, Treasury Secretary Timothy Geithner and director of the National Economic Council Larry Summers, are floating the prospect of a middle class tax increase. Will Obama be maneuvered away from his promise just as Bush Sr. was?