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Tag: economy

We’re (Almost) All In This Together

In this horrible time of economic collapse, it is truly touching to see so many corporate chieftains reaching out in solidarity to the hard-hit working class.

We know they're doing this, because they keep telling us they are — practically every brand-name giant has been spending millions of dollars on PR campaigns in recent weeks asserting that they're standing with us, declaring over and over, "We're all in this together."

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Economy Won’t Reopen With A Bang

From the first moment Donald Trump recognized the serious nature of the new coronavirus pandemic, his impatience has been palpable. Over and over, he stressed how quickly we would get past it. And even after extending the guidelines that restrict activity until the end of April, he continues to predict that life will soon be back to normal.

"It would be nice to be able to open with a big bang and open up our country or certainly most of our country," he said Wednesday. "And I think we're going to do that soon." Treasury Secretary Steven Mnuchin was similarly optimistic, predicting that "we could be open for business in the month of May." Attorney General William Barr insisted that by then, it will be time "to allow people to adapt more than we have and not just tell people to go home and hide under their bed."

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Trump Team Pushing To Reopen Economy In May

Donald Trump and his administration are pushing to end social distancing measures and reopen the U.S. economy by May. But since Trump refused to issue a national stay-at-home order, it is unclear what it he would lift.

Treasury Secretary Steve Mnuchin was asked in an interview on CNBC on Thursday if he believed the country might really reopen in May.

"I do," he said.

Mnuchin continued, "I think as soon as the president feels comfortable with the medical issues, we are making everything necessary that American companies and American workers can be open for business and that they have the liquidity that they need to operate their business in the interim."

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Global Pandemic Reveals World’s Rapidly Evolving Economic Changes

This article was produced by Economy for All, a project of the Independent Media Institute.

When the wealthiest country in the world is unable to produce basic medical gear to cope with a rampaging pandemic, it is dealing with a strategic vulnerability by depending on multinational supply chains to produce manufactured goods. Absent sufficient redundancies and physical reserves of resources, "just-in-time" lean supply systems can't cope with sudden disruptions. The global pandemic of 2020 is a case in point.

This pandemic continues to unfold, but it will serve as the D-Day equivalent of a new predominating economic model for the world, and which in many ways was beginning to take shape before COVID-19. At its core, developed and mixed market economies will factor in the health risk and growing military cost of sustaining international supply chains against investing in high-tech production closer to their markets, and increasingly export their goods to the rest of the world.

Dozens of economies that developed in the past 50 years by enmeshing themselves in the international supply chain on the basis of their labor price advantage will find themselves increasingly cut out of the new process. The contest for global power will increasingly pivot to the extraction and refinement of minerals and component materials that are critical to sustaining the high-tech economy model, away from carbon energy resources. We will be hearing much more about "national stockpiling" and "strategic reserves" beyond oil in the months and years ahead.

Not only has COVID-19 exposed potential health risks and costs involved (as globalized trade routes become vectors of contagion), but the champions of the offshoring phenomenon increasingly resort to myths and misconceptions that are irrelevant to a 21st-century economy. They are as obsolete as spending trillions annually on managing the supply and price of Middle East oil, which American foreign policy figures, including Martin Indyk, are beginning to openly say "isn't worth it."

Before we get into the details on the future economy, let's quickly review how the U.S. saw a massive decline in its industrial capacity. Bad ideas and pernicious orthodoxies grew like barnacles over the decades on what was once the world's leading manufacturer. First was the idea that offshoring is essential to preserving profitability. Often this assertion has been more apparent than real. As far as profitability goes, many companies have made choices to move manufacturing offshore despite continuing domestic profits on home shores. For example, the five North American plants that General Motors (GM) shut down in 2019 were still profitable, but the company, which had received a government bailout in 2009, chose to refocus on the higher-margin operations in China.

Of course, capitalism controlled by bankers and speculators gives free rein to companies to make profits on how they see fit. The consequences are that for decades, Detroit's "Big Three" automakers have consistently underperformed their German and Japanese counterparts because of their decision to embrace a Wall Street-driven culture that has prioritized short-term quarterly earnings, massive dividend payouts and unprecedented spending on stock repurchases over productive investment in innovation. And as GM's 2019 experience illustrates, the resultant profits did not go to spur domestic reinvestment, which in turn creates domestic employment, but abroad to expand China's manufacturing base. GM is but one example of the hundreds of major corporate actors that have denuded the country's industrial ecosystem, creating gaps in the U.S. workforce and shortages of vital skilled labor.

There are also multiple examples of companies acquiring smaller innovative companies "solely to discontinue the target's innovation projects and preempt future competition," according to researchers Colleen Cunningham, from London Business School, and Florian Ederer and Song Ma, both from Yale. A particularly poignant example of these "killer acquisitions," given today's ongoing ventilator shortage, is Covidien's attempted 2012 purchase of California-based Newport Medical Instruments, a smaller competing medical device company that had secured a contract from the federal government in 2010 to produce up to 40,000 mobile ventilators. But as David Dayen of The American Prospect observed, the purported rationale for the acquisition was bogus: It had nothing to do with expanding Covidien's product base and everything to do with destroying a competitor whose product "could cut into its existing profits."

For years, the political economist Seymour Melman argued that companies that embraced the soft option of downsizing/offshoring labor would ultimately create grave production weaknesses in the U.S. economy and stifle innovation. Higher domestic wages, by contrast, would induce competent managers to compensate by using and investing in more and better machinery, which in turn would lead to a virtuous cycle of production: higher profits, which can lead to higher wages, leading to better machinery and organization of work.

While American companies may think they are improving their individual competitiveness in the short term by shifting operations to low-cost labor economies, the current pandemic illustrates that they collectively undermined America's (and their own) competitiveness over the long haul.

Intuitively, Melman's forecasts make sense. A modern manufacturing "ecosystem" makes it much easier to redeploy and pivot to new priorities when there are shortages in vital areas. China, for example, has a sufficiently deep and robust industrial infrastructure to adjust production lines quickly, even as the U.S. continues to struggle with ventilator shortages. And in Germany, a flagship company like Siemens, for example, announced that it is "making its Additive Manufacturing (AM) Network along with its 3D printers, available to the global medical community to speed design and production of medical components … to enable faster and less complicated production of spare parts for machines like ventilators."

The Next Economy

A combination of existing technologies and capacities that are already in business application and on the rise will enable the new era of production and global economic overhaul and develop in motion with Melman's thinking. These include artificial intelligence computing, automated manufacturing and increasingly universal and portable manufacturing equipment, innovations in energy production and storage, high-speed data transfer, and nanotechnology. Some of these technologies are mature, profitable and business-ready. Others are still in an early phase but will be seen as more economically viable or worthy of state investment and subsidy in light of a growing awareness among policy planners that the consequences of running global supply chains are potentially more expensive.

All of these technologies are revolutionary. Their concomitant rise will create a new economic era dominated by the countries that fully integrate them into their economies:

  • AI computing has the capacity to introduce game-changing efficiencies in the production process, quality control in terms of production and blueprints for new models of production and consumption. It can handle huge volumes of administration and management of automated systems. This industry is estimated to be growing at an annual rate of over 45 percent.
  • Automated manufacturing can be expensive and requires skilled labor to maintain, but it can produce goods at precision levels beyond what people can make, as well as at increasing volumes. 3D manufacturing is a universalizing process: one machine capable of producing a dizzying number of products that already competes with some products from global supply chains. Many companies are locating back in deindustrialized New York and other U.S. cities on the back of 3D manufacturing.
  • Recent major advances in energy production—from solar and wind to geothermal and energy storage—are the holy grail of non-carbon energy sources, permitting solar and wind industries to compete on a 24-hour basis with carbon-based fuels, giving more weight for policy planners to minimize fuel imports and revisit dormant energy alternatives.
  • High-speed data transfer—enabled through satellites and huge server farms—is necessary for the multi-location management and logistical coordination of the segments of the new supply chain: the means of information transfer and the capacity of one hand to know what the other is doing.
  • The rise of nanotechnology—the capacity to engage in precision design and manufacture at a molecular scale—presents humanity with a new frontier of materials and products that have capabilities beyond what we currently know in terms of materials, products, medicines and much more. Products ranging from glass to suntan lotion are already vastly enhanced by nanotechnology production. Qualities of human-made materials such as those designed for fireproofing, bulletproofing, insulation and space travel are in the midst of being revolutionized. Medicines can be deployed through nanotechnology at the molecular level, vastly improving their effectiveness.

The collective strength of these technologies will diminish the appeal of finding cheaper labor outside a country's borders or common market—and the costs they entail. Countries that are advanced along these lines and have access to the minerals required to engage in this form of production will prosper, plugging into their existing consumer market and building up a head of steam that will eventually lead to a new chain of international exports and imports. These trend lines will accelerate the decline of brick-and-mortar retail and service industries.

Export-led economies that grew on the back of a labor price advantage will find themselves in a role reversal of having the option of importing better goods from the markets they once exported to or paying intellectual property (IP) licensing fees to produce them domestically. The geopolitical advantages that went with offering a developing country a labor role in a global supply chain will be replaced with discounts on IP licenses or imports.

The past phases of industrialization saw an ongoing contest among wealthy countries for control of petroleum, minerals and shipping lanes, using all their available powers to obtain them. The historical pattern is that residents of the resource-rich and undeveloped countries suffer far more than prosper in the mineral extraction and export process to wealthy markets. Barring a major shift in attitudes to wealth distribution or successful political resistance to exploitation, the pattern will likely continue, with the wealthy countries' preoccupations pivoting increasingly from carbon energy resources to the components of the new economy: cobalt, lithium and rare metals. Resources that sustain the present and future economies, like iron, copper and gold, will continue to retain their strategic value.

Much of Europe and Asian countries like China, South Korea and Japan are poised for the transition. Based on their traditions of rigid state-driven capitalism, these nations instinctively grasp how state capacity and direction can help drive further industrial development. It remains to be seen if the U.S. is fully capable of it. That is unlikely, if the prevailing neoliberal ideology persists, limiting the role of the U.S. government to be, at best, a neutral umpire that sustains efficient, rent-free markets able to supervise the delivery of an increasingly narrow set of public goods (as opposed to an active participant in industrial policy).

The U.S., with thousands of advanced research institutions, is certainly capable of the next stage of economic development. It has a developed market and a partial manufacturing base. But it also has a long history of wage-avoidance for its workforces and an utterly dysfunctional political process. You need nation-state competence and highly skilled labor in this new world, as well as a willingness to expand ownership and dividend models to workers and the governments that funded the research for this advanced economy.

The coronavirus pandemic will force the U.S. and other countries to stop making distinctions between low-tech business (supposedly fine to offshore) versus high value-added industry. Not only can production lines be altered to cope with shortages (as China is doing), but there is often a continuum in the industrial ecosystem.

Consider the case of surgical masks. Even though their production is ostensibly a low-tech commodified business, the critical inner filtration layer of a mask, which allows the wearer to breathe while reducing the inflow of possible infectious particles, is a high-end business: Costing "upward of [$4.23 million] apiece, the machine that creates this fabric melts down plastic material and blows it out in strands, like cotton candy, into flat sheets of melt-blown fabric for face masks and other filtration products. A similar line of machines can create a related kind of fabric, called spun-bond fabric, also used in face masks and in medical protection suits worn by health-care workers," according to a report carried by National Public Radio.

The point is that there is a continuum. One creates the demand for the other. Eliminate one industry and another potentially dies, much like a biological ecosystem. We now know that when forests are cut down, at some point if the surviving forest is too small, the whole ecosystem collapses. The ecosystem has to be large enough to encompass all of the niches that make it work.

If the machine tool industry is allocated in one country, the textile industry in another, the steel industry in another, the whole thing becomes much more delicate and inefficient, depending on a greater range of variables to succeed. Crucially, the speed with which innovations can ricochet around the system decreases significantly. When Japanese auto manufacturers have access to Japanese machine tool makers, they can get at the machine tool advances before GM and Ford. Proximity becomes a competitive advantage.

All of which helps to explain why the distinction between offshoring hardware while retaining software is not only fatuous but damaging to long-term economic welfare.

Offshoring left the U.S. unprepared for COVID-19. It has also occasioned a widespread reassessment of globalization: What was once seen as the heretical refuge of economic nationalists has now become respectable again. Even without this pandemic, the foundations of America's economic model were failing and becoming rapidly obsolete.

The question is: As the world moves to a post-carbon future, can the U.S. economy take away the primacy of rent-extracting sectors like finance, insurance and real estate; Hollywood films, smartphone apps, or increasingly irrelevant sectors like oil and natural gas exports, and join the leaders of the pack? Or is coronavirus merely the pandemic that presages a more terminal disease?

Marshall Auerback is a market analyst and commentator.

Jan Ritch-Frel is the executive director of the Independent Media Institute.

What Happened During America’s Last Trillion-Dollar Bailout

Reprinted with permission from ProPublica.

Never in U.S. history has there been a moment like this: Trillion-dollar proposals are pouring forth from Capitol Hill in a mad bid to save the economy from the ravages of a pandemic.

On the other hand, 2008, when toxic mortgage assets made “bailout” a political buzzword, wasn’t so long ago.

Back then, Congress, to revive a financial system paralyzed by devastating mortgage losses, opened the nation’s wallet wide, passing a $700 billion bailout. The following year, as unemployment rose, credit froze and public coffers dried up, it kicked in $840 billion more in a stimulus bill designed to save and create jobs and jump-start consumer spending. Of course, these helicopter drops of taxpayer cash seemed ripe for waste and fraud, so we decided to track where the money went.

What we learned from dogging those massive efforts provides some important lessons for today’s crisis. Many of the proposals lawmakers put forth this week — a grab bag of rescues for affected industries, broad loan programs and cash payments — the U.S. tried not too long ago.

Here’s a key takeaway: The reason we can easily update you on the pitfalls of the 2008-09 bailout is … it never actually ended. (And guess who keeps updating ProPublica’s Bailout Tracker?) Massive interventions have a way of leaving a mark. The government took over Fannie Mae and Freddie Mac, the giant mortgage finance entities, in 2008, and they remain in conservatorship. Tens of millions each month are still going out under the Troubled Asset Relief Program, the bailout’s misleading moniker, through next year. (We’ll get back to what TARP ended up doing in a bit.)

So, while a crisis provoked by a rampaging global virus certainly looks a lot different from one caused by toxic mortgage assets, the proposed solutions already on the table really aren’t.

President Donald Trump’s marquee proposal, also embraced by some Democrats, is a $500 billion plan to send stimulus money to American taxpayers as soon as early April. But history shows that the much-anticipated cash relief might not come as fast, or end up as well targeted, as the Trump administration is promising.

The Bush administration tried a similar stimulus measure in February 2008 when it sent $600 tax rebate checks to middle-class workers, with additional money for parents with children. But workers didn’t get them for three to five months — much longer than the two to three weeks Treasury Secretary Steven Mnuchin is currently promising.

When the checks did arrive, people didn’t run out and buy things. Most of the money was saved or used to pay down debt.

When President Barack Obama took over, he pitched a much larger, but ultimately insufficient stimulus package, designed around “shovel-ready” projects, safety net spending and investments in clean energy. Many people forget that the biggest item was a middle-class tax cut. But instead of sending checks, the administration chose to dribble the money out in paychecks at about $10 a week over two years, hoping that this way consumers would spend more of it. They didn’t.

There’s even more reason to believe that the proposed stimulus checks will be saved this time.

By definition, stimulus programs aim to get people to go out and spend, creating demand that creates jobs. But to slow the spread of the coronavirus, government officials are telling, and in some places ordering, people to stay home. Extra money would certainly help workers who’ve lost their jobs or seen their hours cut. It might even encourage people stuck at home to buy new laptops and TVs, helping foreign manufacturers and domestic warehouse workers and truckers. But as popular as tossing cash from helicopters might be, lack of money is not the reason people with jobs aren’t spending right now.

Economic studies have shown there may be more efficient ways to spend $500 billion to aid those in need, such as expanding food assistance, unemployment benefits and other safety net programs as well as incentives to stem the tide of layoffs.

One of the most effective programs from Obama’s stimulus package was a $50 billion fund to shore up state and local budgets, which has been credited with saving the jobs of more than 300,000 teachers and support staff. Sending money to local governments could help down the line as tax revenues plummet along with the economy.

The Trump administration and Congress could do something similar with private businesses now, encouraging them to pay their workers during shutdowns, as Honda has pledged to do.

One proposal floated in a recent Treasury Department memo obtained by The Washington Post is a program that would guarantee $300 billion in loans to help small businesses meet payroll for eight weeks.

But policymakers should also consider the success that Germany had during the last recession with a program known as “work sharing.”

The idea is that businesses will eventually need to ramp up again whenever this especially unpredictable crisis is over. Under work sharing, instead of laying workers off, employers reduce hours, and the government pays partial unemployment benefits to make up for lost wages. For some workplaces, such a program could also achieve the goal of social distancing or allow people a way to balance the new child care and teaching demands caused by school closures.

But according to the National Conference of State Legislatures, more than 20 states don’t offer work sharing programs.

There’s also a lesson from the bailout about what happens when Congress hands an administration broad authority without clear direction or restrictions.

One clear lasting legacy of the 2008-09 bailout is a chronically flawed mortgage modification program, one launched with the promise of saving millions of people from foreclosure, but characterized by ongoingchaos, lax enforcement of its rules and failure. The program was rolled out months after the Treasury Department had quickly pumped hundreds of billions into banks with few strings attached.

This happened because, with pressure to act quickly in 2008, Congress gave the Treasury Department broad discretion to essentially make things up as it went. That’s how — and why — even though the TARP was conceived as a giant program to buy up toxic mortgage assets, the government almost immediately abandoned that idea. Instead, the Treasury Departments of both Bush and Obama spun out an array of programs, successfully bailing out AIG, large banks and the auto industry — and only later launched a notably unsuccessful program for homeowners. (For a rundown of who paid the money back, see here.)

It’s the kind of freedom Trump’s Treasury Department appears to covet: Its recent proposal suggests giving it the authority to send $50 billion to the airlines and $150 billion to “other severely distressed sectors,” with the Treasury determining the “appropriate interest rate and other terms and conditions.”

The TARP had relatively robust oversight built in, and it’s an aspect that should be repeated, said Neil Barofsky, who served as the special inspector general for the TARP from 2008 to 2011.

“You cannot push out $1 trillion without scandal. There’s going to be crime, there’s going to be fraud,” he said. “But with strong and effective oversight, you can limit it.”

Not only did the TARP have Barofsky’s office, but there was also the Congressional Oversight Panel, which was headed by a Harvard professor named Elizabeth Warren. The SIGTARP, as Barofsky’s office was known, released scathing reports and brought criminal cases against bankers who’d lied on their bailout applications, while Warren’s panel publicly raked Treasury Secretary Timothy Geithner over the coals for being too generous to banks while doing far too little for ordinary people.

Whatever proposals are ultimately adopted, taxpayers should be able to see how the government is spending their money. In 2009, Obama’s stimulus package created an accountability and transparency board, requiring any entity that received contracts, grants or loans to file quarterly reports that were posted publicly on a government website.

Extending the idea to all federal spending was supported by people as far apart politically as then-Vice President Joe Biden and former Rep. Darrell Issa, R-Calif., who chaired the House oversight committee. Some provisions made it into law, but the larger effort failed to get traction, and the board and its website shut down in 2015. Perhaps it’s time to resurrect the idea. Without adequate testing, we may not know the full reach of COVID-19; but at least should be able to track the money spent to respond to the crisis it’s leaving behind.

Do you have access to information about the government’s response to the economic fallout from the coronavirus that should be public? Email Michael Grabell at michael.grabell@propublica.org and Paul Kiel at paul.kiel@propublica.org. Here’s how tosend tips and documents to ProPublica securely.

Former Trump Adviser Hassett Predicts “A Million Jobs” Lost

Donald Trump’s former top economic adviser issued some dire warnings about the economic impact stemming from the global spread of the novel coronavirus, saying that he is almost certain the fallout will lead to a global recession and unprecedented job losses.

“I think that the odds of a global recession are close to 100 percent right now,” Kevin Hassett, who served as Trump’s chair of the Council of Economic Advisers until June 2019, told CNN’s Poppy Harlow on Monday.

Hassett was speaking about how social distancing measures being put into place to stop the spread of the virus will cause the American economy to plummet, with job losses possibly reaching 1 million or more.

“I think the U.S. we’re going to have a very terrible second quarter,” Hassett said on CNN. “You know we just ran the numbers … carefully over the weekend, and we think the second quarter is going to me minus 5 percent, and we think the jobs number in early April might me as much as minus a million or so, because … nobody’s going to get hired next week.”

Hassett went on to say that if job losses get that high, “you’re looking at the worst job numbers we’ve ever seen.”

Markets have fallen sharply as predictions of a global recession set in, with the Dow Jones Industrial Average falling more than 1,500 points on Monday as of the time this article was published.

This came after the Centers for Disease Control and Prevention on Sunday recommended that gatherings of more than 50 people should be postponed for at least eight weeks  — leading governors across the country to order businesses closed, impacting millions of workers.

Congressional Democrats are seeking to provide economic security to those workers, pushing for paid sick leave and increased access to food security programs, as well as free testing for coronavirus.

A bill that includes those measures passed the House last week, but the Senate has yet to take it up, as GOP senators are opposed to some of the provisions in the House bill.

That means economic protections won’t be passed until at least midweek, NBC’s Kasie Hunt reported.

Democrats have expressed anger and frustration that Senate Majority Leader Mitch McConnell sent the Senate home over the weekend, continuing to delay passage of worker protections as the economic fallout marches on.

“Every minute, hour, & day that Fed action is delayed on Coronavirus puts lives at risk,” Rep. Alexandria Ocasio Cortez (D-NY) tweeted on Saturday.

Published with permission of The American Independent Foundation.

Trump’s Mediocre Economic Gains, In Three Graphs

Reprinted with permission from DCReport

At Tuesday night’s State of the Union address, Donald Trump claimed repeatedly that he has created a great economy. Trump may have hoped that people forget his towering 2016 claims and promises. My spring 2019 analysis of Trump economic performance was a grade of C , average.

So, what are the facts? Here are some hard numbers to judge Trump claims against reality.

Gross Domestic Product growth in the last quarter of 2019 was 2.1 percent. For the entire year, it was 2.3 percent. That means economic growth slowed.

That’s nothing to brag about. The average growth rate since 1947 has been 3.2 percent.

Voters should remember Trump promised if elected that he would blow away the performances of predecessor Barack Obama and others.

Here’s Trump in September 2016 on GDP growth: “We are looking at three percent but we think it could be five (percent) or even six (percent). We are going to have growth that will be tremendous.”

During the final presidential debate a month later Trump promised that if elected, “We’re bringing it (economic growth) from one percent up to four percent, and I actually think we an go higher than four percent. I think you can go to five percent or six percent.”

Jobs Growth Slows Under Trump

And how about jobs growth? Trump promised jobs galore but jobs growth has slowed significantly.

Obama inherited a collapsing economy. Three million jobs vanished in the first four months of 2009. That awful trend reversed in October 2010 when the economy began growing jobs in an unbroken chain since.

From then through January 2017, Obama’s last month in office, jobs averaged 201,600 per month.

Trump, from February 2017 to the end of 2019, averaged just 191,100. That’s 5 percent less per month.

Another White House announcement boasted that last year showed an average of 176,000 new jobs per month. That’s 25,000 fewer jobs added each month than under Obama, a decline of almost 13 percent.

So much for exceeding expectations.

Wages have increased. But that apparently is due to local and state increases in the minimum wage.

The federal minimum wage of $7.25 an hour was set in July 2009. Inflation has eroded its value to about $6 per hour today.

Trump has said he may, possibly, perhaps, someday consider increasing the minimum wage. Trump’s chief economic adviser, Larry Kudlow, calls the minimum wage “a terrible idea.”

Soybeans Shrivel and Farms Go Bust

How’s it going for soybean farmers since Trump’s gratuitous trade war promoted China to buy soybeans from Brazil?

Farm bankruptcies increased by 20 percent  in 2019 compared with 2018, data released by federal courts last week showed.

Family farm bankruptcies, known as Chapter 12 filings, have been on the rise since 2015. But remember Trump promised to improve the lots of America’s farmers, not make them worse.

Trump’s trade war with China has created a boom for Brazilian soybean farmers. Soybeans are America’s second most valuable crop, worth $39 billion in 2018, right behind corn at $51 billion.

In 2019 China grew more than 17 million tons of soybeans, about a third of its consumption. China has started expanding soybean production, which it could quickly multiply. Afterall, the can-do spirit thrives in China, which just built a hospital for Coronavirus patients in 10 days. Ten days.

Should Beijing decide to further expand its soybean farms then American farmers will have permanently lost sales. In turn, American farm incomes will shrink.

To provide cover for his trade war Trump is giving American soybeans farmers $28 billion of taxpayer money. About $19 billion has already been turned over. Don’t expect Trump to mention this Farm Belt welfare as what it is, socialism, and a burden for all taxpayers.

Then there’s the Trump/Radical GOP tax law adopted in December 2017. It slashed the corporate tax rate 40 percent. The lowered individual rates heavily favor the richest Americans.

That law was, Trump claimed, going to spur a massive increase in domestic capital investment, which is a key to more jobs.

After a brief increase in domestic capital investment in 2018, it has fallen back to previous levels. In other words, the Trump tax cut did not do what Trump promised.

Trump also promised voters he could pay off the federal government’s debt if he got two terms. Instead he already has pushed annual budget deficits back to the trillion-dollar level.

So, in light of Trump’s Tuesday night address to Congress, ask yourself if what he says is fact or fiction.

Financial Elites Seem Oblivious To Threat Of Economic Calamity

This article was produced by Economy for All, a project of the Independent Media Institute.

Can runaway booms descend into busts absent monetary tightening by the world’s central banks? I pose this question in the wake of an extraordinary exchange on January 22 at Davos between Bloomberg editor-at-large Tom Keene and Bob Prince, co-CIO of Bridgewater Associates, in which the latter posited the notion that “we’ve probably seen the end of the boom-bust cycle.”

It is striking that one of today’s titans of finance has given us what appears to be another version of “this time it’s different,” which the famous investor Sir John Templeton once described as “the four most expensive words in investing.”

My own basic take has been that the U.S. economy over the past three years has been weaker than the underlying quantitative data suggests and that there is ample historical precedent to suggest that credit cycles can end, even in the context of a low interest rate environment, notably via a deterioration in the quality of credit itself, as the great economist Hyman Minsky once explained in his financial instability hypothesis. The truth is that for decades, the U.S.—indeed the entire global economy—has been characterized by an economically unsustainable model in which larger and larger portions of GDP gains have been going to a smaller number of people at the top (who also have a higher propensity to save than people with lower incomes, which means the “trickle-down” effect is minimal to nonexistent). Wage gains also appear to be leveling off, which could have ominous implications for sustainable future growth. Yet many investors like Prince seem to accept today’s buoyant asset bubbles as a given in the absence of a concerted effort by the central banks to “take away the punch bowl just when the party gets going” (in the famous words of former Fed Chairman William McChesney Martin), via higher interest rates.

In the words of Bob Prince (quoted in Doug Noland’s Credit Bubble Bulletin):

Bob Prince…: “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn—wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom-bust cycle.”

Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guesstimates of what central banks will do?”

Prince: “That won’t play much of a role nearly as it has. You remember the ’80s when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [BPS Fed rate increase], 25 minus. We’re not even going to get 25 plus or minus and we got negative yields. That idea of the boom-bust cycle—and that history that we’ve been in for decades—is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease—nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”

Prince goes on to acknowledge that “cycles in growth are caused by the boom and bust in credit: Credit expansion, credit contraction,” but makes the assumption that “those expansions and contractions of credit are largely driven by changes in monetary policy.”

That may have been the case for much of the post-World War II period, but if we look back further, there is evidence to suggest that Prince’s hypothesis is another variant of the dangerous “this time it’s different” truism.

Why have so many people gotten this wrong?

The misconception probably stems from a famous statement made in 1997 by the MIT economist Rudi Dornbusch: “None of the U.S. expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve,” and this was more or less true of the U.S. economy from 1946 until the 2000s.

But then economic dynamics changed. Yes, the Federal Reserve raised the Fed funds rate by 400 basis points in the mid-2000s, but it reversed almost all of that move and began opening the floodgates of bailout financing by early May 2008. Nevertheless, the U.S. and global economy fell off a cliff in the second half of that year as global financial fragility erupted into a full-blown global systemic crisis to a degree unseen since the 1930s.

Why was it different that time? The reason is that there had emerged myriad asset bubbles and a related unprecedented rise in private indebtedness in the U.S. and other economies. These supports to cyclical demand expansion were unstable and unsustainable. In other words, these were conditions very similar to those that prevail today.

Hyman Minsky and Irving Fisher described how once the debt “disease” goes metastatic there will come a “Minsky moment” when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, the Fed is powerless, no matter how much they want to bring the punchbowl back.

The U.S. and much of the global economy still have quasi-bubbleized assets and very high levels of private (and quasi-private) indebtedness. Bob Prince and many of his investment cohorts appear to remain oblivious to the threat of a Minsky/Fisher debt deflation dynamic, which the Fed and the central banking fraternity can do little to stop, if one is to judge from today’s current buoyant stock markets.

There is yet another way in which global economic growth can slow or even falter this time around, which I have discussed before (in the context of China’s economy): This thesis dates from “a very old idea from business cycle theory prior to the Second World War that private sector over-investment can become so unsustainably high that even without a fiscal/monetary shock, there could be a fall in autonomous investment. Once that begins,” a weakening edifice of highly suspect and marginal lending activity “can lead to a cumulative economic contraction even if interest rates plummet and monetary conditions ease.”

This old idea from the history of economics has largely been forgotten due to changes in the fads and fashions in academic economics. But there are grounds for thinking it is an idea whose time has come once again.

Globally, we have a glut of consumer goods, much of it emanating from China, but given increasingly weakening demand from an economy that is growing more and more skewed to the top 1 percent, we have fewer consumers able to buy it. Moreover, in China itself, modest fiscal stimulus measures undertaken at the end of last year could well be overridden by the onset of the coronavirus, which risks undermining the impact of these recent upticks in infrastructure investment, along with the potential benefits accrued from the cessation of the trade war with the U.S. government.

It follows that the world has a condition of over-investment that is unsustainable. This means there will be less investment to produce additional goods. Much like a rickety building on shaky foundations, therefore, a decline in global autonomous investment threatens to plunge us into a global economic slowdown, independent of actions by the global or national monetary authorities.

Are there any signs of this? Over the past year, global growth “recorded its weakest pace since the global financial crisis a decade ago,” according to the International Monetary Fund. This, despite buoyant risk asset markets, credit and money growth in key economies well in excess of nominal GDP, super-easy monetary policy everywhere, and an end of the fiscal restriction of recent years. Therefore, we cannot attribute this surprising softening to a “murderous Fed” (to paraphrase Dornbusch) or its cohorts in the global central banking fraternity. It is, however, possible to posit that we may be seeing a cresting of excessive global fixed investment, which eventually could cause a global recession. There is no question that our central banks and governments will try to do “whatever it takes” to postpone such a decline.

The point is that, relative to the post-war business cycle patterns in most people’s minds, the end of this global expansion does not need a “murderous Fed.” Excessive risk asset valuations and high indebtedness, even in a world of low prevailing interest rates and unprecedented central bank intervention, can nonetheless lead to negative financial and economic dynamics. And given excessive global capital spending in a world where the warranted rate of growth has now downshifted, an autonomous decline in excessive investment can do the same. Add to this the increasing risks brought about by the spread of the coronavirus, and you’ve got the ingredients for an incipient global economic calamity.

Marshall Auerback is a market analyst and commentator