Webster Tarpley | 25 Aug 2015
Calls Are Heard for the Fed to Lower Interest Rates into Negative Territory; More Pushing on the String of Monetary Policy Will Not Work; After Failures of Fiscal and Monetary Stimulus as Well as the Debacle of Austerity Cuts, It’s Time to Try Credit Stimulus in Form of $6 Trillion of 0% Long-Term Federal Reserve Credit for Infrastructure and Education – Not Speculation – to Create 30 Million New Productive Jobs
Recent turbulence in the stock market, the commodities market, and in world finance generally derives first of all, from the inability of the Xi leadership of China to control the bubble economy they set in motion some time ago. As a result, the prices of oil, copper, and other basic commodities have been subjected to severe price declines. These declines have violated the expectations of many zombie bankers and hedge fund hyenas, who had built up derivatives portfolios based on continued speculative booms in some of these areas. Therefore, the disruptive potential of the Chinese crisis in the West is considerable.
This is all the more true because, despite the optimistic hype coming from the Obama administration, it is clear that the United States has never really recovered in real economic terms, from the catastrophic events of 2008. Financial markets, notably the stock market, have gone up, but the real economy of manufacturing, agriculture, mining, energy production, transportation, scientific research, and related activities of tangible physical commodity production has remained stagnant or declining, with a growing permanent deficit in investment and employment.
The other problem is the manifest incompetence and stupidity of the US Federal Reserve System under Janet Yellen. Rich plutocrats and rentiers — people who have large amounts of money – have been screaming for years that they wanted interest rates to go up so they could get a better return on their hoarded wealth. This has been a favorite libertarian argument advanced by the Paul faction. Of course, for the average American groaning under tens of thousands of dollars of high interest consumer debt, raising interest rates would be a calamity.
As a result of the plutocratic pressure, the Yellen Federal Reserve was, or is, about to repeat the catastrophic blunder of the Federal Reserve inflation hawks of 1937, when the incompetent Secretary of the Treasury Henry Morgenthau demanded retrenchment and pushed the economy into reverse in the so-called New Deal Recession. Billions of dollars of hot money had rushed into New York in the expectation that the Fed would raise interest rates in September, leading to an increase in the value of the US dollar, and thus to a tidy short-term profit for these speculators. Because of the sharp falls in the New York stock market last Thursday and Friday, it has become at least dubious whether the Fed will in fact raise these interest rates in September. Once that impression became widespread, British and other speculative interests began pulling their money out of New York over this past weekend, leading to the markets 1100 point decline in the first five minutes.
The other consideration of central bankers like Yellen has been the desire to acquire a minimal stock of “ammunition” (as they term it) to be able to deal with a major economic slowdown in the very near future. If interest rates are at or near zero, it would be hard for the Fed to provide an effective stimulus by lowering these rates.
A remarkable aspect of today’s market declined has been the increasing demands not only that the Fed should not increase interest rates at its much discussed September meeting, but also that Yellen & Co. should now begin to consider further lowering of interest rates. Since rates are already very close to zero, this evidently means that the Fed should cross over into negative interest rates. This would mean that the Fed would demand an annual percentage rate to allow the member banks to store their funds in its vaults, or to carry out certain kinds of swap agreements, and so forth. A number of European countries, notably Germany, have tried negative interest rates recently, but with limited success.
The attempt to stimulate the US economy with interest rates that are below zero and therefore negative, in the hope that this policy will force the zombie bankers to begin investing, and especially to begin investing in new plant, equipment, and productive labor, is not likely to be successful.
Fed Will Be Pushing on a String
“Pushing on a string” is the typical central banking term for an attempt to provide stimulus to a struggling economy by lowering interest rates. The central banker can offer 0% money, but this may not convince the zombie banker to borrow the money. It is also clear that the zombie banker will not invest in productive plant and equipment, since much larger short-term speculative ripoff profits are available in the derivatives market.
The Fed has tried and failed to stimulate the US economy with three rounds of Quantitative Easing, meaning a monetary stimulus carried out by buying financial assets (generally toxic derivatives, which would represent astronomical losses if they were marked to market). This has been supplemented when necessary by Fed purchases of US government bonds, also with the goal of keeping interest rates near zero. Draghi of the European Central Bank has also been experimenting with this kind of monetary stimulus, but with limited success.
The overall lesson is that monetary policy has been tried in every conceivable way, and has failed to provide recovery from the current depression.
There is also the question of fiscal stimulus. The United States attempted fiscal stimulus in the form of the $800 billion 2009 omnibus stimulus bill passed by Pelosi and signed into law by Obama. This was later strengthened by an additional $400 billion in the so-called Supplemental Appropriations Bill. These actions represented an attempt at Keynesian pump priming. By providing money for unemployment insurance and other social safety net expenditures, as well as by funding highway construction and other permanent capital investments in infrastructure, these two measures produced a modest short-term improvement in US economic prospects.
But, as soon as the reactionary Republicans seized control of Congress in 2010, the notion of stimulus became a dead duck, and the positive aspects of these bills tended to expire. That meant that the US economy began to lapse back into a deeper depression. The Keynesian stimulus approach works very poorly, in part because Keynes as a typical central banker was unable to distinguish between productive and nonproductive activities in any systematic way. The recent Keynesian stimulus relied on consumer spending, which will never lift a modern economy out of depression. Overcoming depression requires that the capital goods producing industries be revived and this has not happened.
We can also see that strategies depending on fiscal austerity, energy austerity, and budget cuts have also failed abysmally, as the situation in Greece and other austerity countries graphically documents.
With all of these tools of governments and central banks having failed, what remains?
The One Tool Remaining: A $6 Trillion Credit Stimulus
The answer is a credit stimulus targeted on infrastructure and thus on the capital goods producing industries, with the goal of approximately 30,000,000 new productive jobs in the case of the US. A Marshal Plan for the Cities and Rural America should provide another 10 million entry-level jobs financed by the US Treasury through the 1% Wall Street Sales Tax on turnover in stocks, bonds, and derivatives.
In order to do this, the Federal Reserve would have to re-conceptualize its mission as a serving the entire US economy, and not just cliques of Wall Street money center bankers. The Republican Congress would of course be violently hostile to any serious recovery measures, but fortunately the current situation makes it not only necessary, but quite possible, to go around them. The Federal Reserve already operates to a large degree outside of the law, since it takes orders from the zombie bankers and not from the elected executive or legislative branches. Accordingly, what is needed in the near future is a peremptory call from the president to Yellen demanding that the Federal Reserve, after having wasted $3 trillion at minimum on buying toxic derivatives under quantitative easing, now switch over to a $5 trillion program of buying infrastructure bonds from states, counties, and cities.
The Fed would be instructed to issue a tender offer such infrastructure bonds, which should generally take the form of 0% interest rate century bonds maturing over 100 years. State governors and legislators, county executives and county councils, mayors and city councils would be invited to sell the Fed their bonds, with the proceeds being used exclusively to rebuild US infrastructure, including the restoration of the interstate highway system, the comprehensive modernization of passenger, freight, and commuter rail, state-of-the-art energy production and the upgrading of existing energy grids, canals, airports, locks, and container facilities, as well as libraries, schools, hospitals, public buildings, and other tangible physical improvements.
Up to now, the central bank has done nothing more than offer loans of speculative hot money at interest rates approaching zero. The depression has continued. At this point, it is necessary for the central bank to begin acting like a national bank, by stimulating, not just the credit supply, but also the credit demand in the form of funding for the urgently needed projects just outlined.
On top of this, a special $1.4 trillion student loan credit window should be opened to offer new college loans and the refinancing of existing college loans at 0% over multi-decade maturities. This would serve to limit future growth in the crushing burden of high interest student loans, which is currently preventing the millennial generation from completing their education and getting permanent jobs, homes, and the other necessities of life.
If the US economy should go into decline once again during the coming weeks and months, with interest rates not far above 0%, the Federal Reserve may soon have no choice but to turn to this policy. It is a question of using the inherent credit creating power of the American people and the US economy for the purpose of job creation and overall economic recovery, with rising standards of living, full employment, increased longevity, and a general improvement in culture and prosperity.
The process just outlined could represent the first phase in a gradual nationalization of the Federal Reserve and its transition from banker-oriented central bank to a dirigistic, Hamiltonian national bank responsible for the well-being of the entire US economy, including the primary components of working families, human capital, and productive labor. The Tax Wall Street Party stands ready to provide leadership and advice during this process.
