Paul Craig Roberts: "How Long Can The Federal Reserve Stave Off The Inevitable?"

Authored by Paul Craig Roberts,

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US 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 American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy.

With the decline in income growth, the US economy stalled. 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. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

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 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.

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.

To achieve its aim, the Federal Reserve had to lower the interest rates to zero, which even the low reported inflation reduced to negative interest rates. 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.

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.

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.

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.

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.

It is no secret that the Federal Reserve controls the price of bonds by openly buying and selling US Treasuries. Since 1987 the Federal Reserve can also support the price of US equities. If the stock market tries to sell off, before much damage can be done the Federal Reserve steps in and purchases S&P futures, thus driving up stock prices. In recent years, when corrections begin they are quickly interrupted and the fall is arrested.

As a member of the Plunge Protection Team known officially as the Working Group on Financial Markets, the Federal Reserve has an open mandate to prevent another 1987 “Black Monday.” In my opinion, the Federal Reserve would interpret this mandate as authority to directly intervene.

However, just as the Fed can use the big banks as agents for its control over the price of gold, it can use the Wall Street banks dark pools to manipulate the equity markets. In this way the manipulation can be disguised as banks making trades for clients. The Plunge Protection Team consists of the Federal Reserve, the Treasury, the SEC, and the Commodity Futures Trading Corporation. As Washington’s international power comes from the US dollar as world reserve currency, protecting the value of the dollar is essential to American power. Foreign inflows into US equities are part of the dollar’s strength. Thus, the Plunge Protection Team seeks to prevent a market crash that would cause flight from US dollar assets.

Normally so much money creation by the Federal Reserve, especially in conjunction with such a high debt level of the US government and also state and local governments, consumers, and businesses, would cause a falling US dollar exchange rate. Why hasn’t this happened? For 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. There are numerous columns on my website by myself and Dave Kranzler proving this to be the case. There is no doubt about it.

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. The people who did not benefit from the Ponzi scheme of the past decade are those who understood it was a Ponzi scheme but did not realize the corruption that has beset the Federal Reserve and the central bank’s ability and willingness to continue to feed the Ponzi scheme.

As I have explained previously, the Ponzi scheme 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.

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.

The implication is that war, and not economic reform, is America’s most likely future.

In a subsequent column I hope to explain why neither US political party has the awareness and capability to deal with real problems.

Comments

gdpetti wadalt Wed, 06/27/2018 - 17:22 Permalink

Exactly, the puppet masters in the SG are outing/exposing their OWO puppets as scripted... 'out with the OWO, in with their NWO'... that's their plan.. and it goes much,  much deeper... it is said that they really want to instal their new system before Mother Nature arrives to clean house within the next decade.... waiting till after presents many difficulties...

As for these puppets in the establishment, who cares? They are exceptionally expendable... they've done their job and can now be retired, same with the rest of the herd... this is how it gets culled for market.

Roberts should know this stuff and as for how long will the PPT run this show? as long as they are allowed to.... none of the central banksters want to wreck the show... as they are all in the same boat.... only the sanctioned or small fry countries are outside this system. What Roberts fails to answer to his own question is that this is how the SG are taking down their OWO... step by step as the can gets crushed on the wall... Trumpy has been around for decades and worked the system, but never really been a part of it... so this 'outing' or exposing of our manipulated reality is a lesson not just for him, but the entire American and global herd of  humanity....none of the puppets are willing to out themselves... the smart ones have left town and all that's left is the idiots, egomaniacs and psychos... enjoy the endgame finale... on all sides of the equation... .this OWO system takedown is in every path/vector of society.... the pedophiles in the Church, the banksters, the MSM libtards, the educational corruption, the govt science corruption... et al.

In reply to by wadalt

FreeMoney Cryptopithicus Homme Wed, 06/27/2018 - 17:36 Permalink

I think there are some other factors that also encourage offshoring of manufacturing.  

Labor law

Environmental law

Building codes / land use restrictions

Tax structure

Without equalizing some of these other factors foreign countries with low wages can create the same products for little enough to pay for the product transportation and capital investment needed to make a new plant.

To continue allowing these products into our country will ultimately bring their standard of living here also.

In reply to by Cryptopithicus Homme

Baron von Bud TheEndIsNear Wed, 06/27/2018 - 19:34 Permalink

Roberts is totally correct that Trump's trade war is with US corporations and their offshoring. I think Trump knows this and that's why he's cutting regulations and red tape at home. We've gone too far left on regs. As for labor costs, most factories are highly automated here but labor cost includes disability, pensions, 'diversity' harassment lawsuits, etc. This overhead doesn't exist in China or Vietnam where my  LL Bean t-shirts are made. Trump's war is with the a corporate ideology that says profit is primary to nationality or normal morality. He gave the biggest corporations a huge tax cut. Now they need to play ball with America's workers. They need to acknowledge that we're all Americans and our legal system, which protects their solvency, will not survive if today's angry politics continues for two more years. The S&P500 needs to think about their future and getting Bernie or worse in 2020. There's all these trade tirades going on - good time to give Trump a win and then another to let him feel some support. Then let the wise men of government policy step in for a sit-down and determine the best policy for America's survival. Is it either becoming fascist or a pleading for a negotiated bankruptcy with all the geopolitical implications? It can't be either extreme so plan and do it. Otherwise, Mr. Roberts will be remembered as a sage.

In reply to by TheEndIsNear

calltoaccount philipat Wed, 06/27/2018 - 20:56 Permalink

"America is being shafted by America, not China,"

Baloney.  

America is being shafted by greed-driven US and foreign-based bankster-financed, sociopath-run multinational megacorps-- including members of the MINSC, who have bribed, cheated, lied, stolen, poisoned and murdered their way into almost total control of the US govt., media, finances, economics, and foreign policy to the point where all of those categories are the exclusive purview of venal vultures interested only in generating bigger profits for themselves (especially senior execs and biggest shareholders), everyone and everything else be damned.  

There is no focus on this fact because, as PCR has pointed out numerous times, virtually the entire media (including what some idiots refer to as the "liberal Media"-- when it is nothing of the sort, and just another division of the crony capitalist status quo corruptus) is controlled and operated by and for the benefit of said corporations.  Congress is the popular representation of this paradigm, with about 90% of them totally corrupted (ie. let the lobbyist$ write the legislation)-- while the remaining 10%, fighting for historic American values of decency and morality, are subjected to the know-nothing taunts of singleminded Trumplodites who have totally surrendered their objectivity to hatred and revenge.  

See Altrusim and Sadism in Public Policy:   http://davidswanson.org/?link_id=0&can_id=e8410d8abe0c0daf30d37ec74e7b6…

 

In reply to by philipat

Jimbeau Argentumentum Wed, 06/27/2018 - 22:23 Permalink

Roberts is just like way too many pundits; he rants that the banksters need to all be hanged, and he wants it done NOW !
Fine, I guess... if you want Trump 'accidented' and end up a scorched earth cinder, but those "little people"  (like all of us 99%ers) would have to suffer death or extremely bad living for the next few decades.

When you are trying to topple those 80 guys who own half the world's wealth, it isn't going to be
 possible in Paulie's fairyland time frame. It IS happening, Paul. Grow up a little.

In reply to by Argentumentum

TheEndIsNear FreeMoney Wed, 06/27/2018 - 18:14 Permalink

"To continue allowing these products into our country will ultimately bring their standard of living here also."

This is the most incisive comment I've seen on ZH in quite awhile. It's like a balance beam scale that swings back and forth as weight is added to or subtracted from one side or the other. Ultimately, the scale will balance out as everyone attains the same standard of living . Our government and economy has been surviving on borrowed money (ie; paper fiat currency) since at least 1971, and now even common people are living on borrowed paper fiat currency. Most of the common people in China that I have known live in small rented apartments and mostly eat the cheapest foods they can find; ie, rice, vegetables, tofu, pumpkin, etc. At least the downward trajectory of our economy will cure the obesity epidemic, but many will likely starve. The big question is when?  We are on the downward slope already, but how steep it will be is a question no one seems to be able to answer. 

In reply to by FreeMoney

Baron von Bud Dewey Cheatum … Wed, 06/27/2018 - 21:24 Permalink

So right Dewey. And the reality is the government's forward plan is already in action. It protects the super elites and the rest of us are on a life raft in the Pacific dead zone. Push down the price of gold with naked shorts using the public purse so the DC players and rich get on board cheap. Then pull the plug and screw mom and her young twins in Oklahoma, sink the small farmer, and sell the crown jewels to Asia.

In reply to by Dewey Cheatum …

Endgame Napoleon FreeMoney Thu, 06/28/2018 - 09:31 Permalink

The flat-world marketing ploy, used for selling the US middle class their own suicide, is no longer being bought hook, line and sinker. Thank God.

Trump helped demoralized Americans to get the chutzpah to stand up and fight the Establishment that puts us down. He did it by standing up to them himself, and it does not matter whether (or not) it was just theatrical.

What he brought out was already there, discussed in every nook & cranny of America....10, 15 and even 20 years ago. We just all went along with it and, in that way, are also responsible for it. But the Establishment cannot play us in quite the same way, post-Trump. 

The crushing of the standard of living for most US citizens is being felt too much, particularly by the non-welfare-and-non-child-tax-credit-eligible, non-womb-ptoduvtive citizens and the citizens with kids over 18 who must live on earned-only income, facing rent that has spiked so high that it now devours over half of monthly income.

It is misery city for this group.

Other groups either have low wages from churn jobs propped up by spousal income, retirement income or child support that covers rent, or they—including many of the womb-productive noncitizens—only need to work part time, staying under the income limits for a plethora of monthly welfare programs, offering free or subsidized rent, free EBT food, free electricity, hundreds in free monthly cash, nearly free daycare so that they can work part time to stay qualified for welfare and up to $6,431 in refundable child tax credits to hoist up their paychecks. 

All of this pay-per-birth welfare and refundable-tax-credit welfare for womb-productive citizens, legal immigrants and illegal aliens, working part time, is non-contributory, piled-higher-and-deeper and 100% free to them. 

This group of citizens and noncitizens—with all of their access to unearned income for sex and reproduction—has produced the biggest generation of young, working-age citizens in US history—bigger than the so-called Baby Boom—but they are not working enough hours to run surpluses to support the smaller Boomer generation.

The SS-taxation cap has been raised multiple times since I first started checking, going from $90k to $128,400k.

Libs say the rich, with the ridiculous gap in wealth in this country, can afford to pay either 7.65% or 15.3% on every dime they earn, just like we all do, even on every $100 piecework gig, and that is what 78 million Americans are doing: working piecework gigs, while 42 million womb-productive citizens & noncitizens are working part time in single-earner households to stay under the income limits for welfare, and 101 million working-age citizens have dropped out of a workforce where sex and reproduction pays more than hard work. 

It is easy to say the rich should pay more and more into SS, but the program—unlike the womb-productivity programs of the fake-feminist era—was not designed to make anything perfect or all-burdensome for any one group.

It tries to be fair except to the modestly self-employed who, for the same benefit, must pay twice-as-high SS tax, compared to employees with similar, low income streams.

That is more of a structural flaw, because for the most part, that program is the only one that tries to balance things out, being as fair as possible. Because SS is not means tested, but still has a progressive element, while the rich pay on FAR less of their income, they also get back less in another way. 

Fairness aside—and it is  mostly fair to them as a last-resort insurance program—it is also just the practical business issue that humans will seek whatever reduces business costs. If they raise the cap too much, how much more gutting of jobs will the USA see, especially since, even without raising the cap to the moon, 5 million jobs (and SS contributions) have already been lost to cheap-labor China, which likewise gives companies the advantage of wanton pillaging of the environment away from prying regulatory eyes despite what the leftists claim.

China, not the USA, is the king of coal and a cheater on emissions standards, as Trump pointed out, while the pious, lefty environmentalists pillaged him for being a nature-hating cad.

One thing that might help reduce manufacturing costs is what Musk is doing: manufacturing in tents. It is also more environmentally friendly, no? What would the Native Americans—the Indians—say about refraining from despoiling the Earth with another bigly, ugly, industrial building, opting for a nice tent that does not make a dent on the virgin soil when production ceases in that location? 

People were mocking Musk on here, as usual, but isn't a huge part of the cost of manufacturing in the USA linked to the big factory buildings that must be erected? The tents could also be mobile, allowing manufacturers to go close to the market that needs to be supplied, building the product there and avoiding shipping costs. 

This might really flatten competition, worldwide, allowing people around the globe to compete based more on the quality of the product that they turn out again. Right now, they are mostly competing based on cheap labor and other unfair, rigged means.

Deplorables around the world, not just in the USA, are getting tired of the fallout from it. Deplorables are getting tired of pretending, too.

Thanks to this article for explaining the lion’s share of this Ponzi, which I really do not understand. It is pretty math-oriented or related to ways of thinking that I really have no grasp of.

I did not understand that the Made-in-China goods of American-owned companies were regarded as imports when shipped back here, but I have always wondered about it. It is like a trade deficit with a bunch of de-facto exiles. 

I do, however, understand the part about the impact of US-in-name-only companies shipping even more jobs (5 million, not 2 million) and potential SS contributions) than I thought to non-racially-diverse China, while using another cynical & demoralizing marketing ploy to distract Americans from the economic implications: calling Americans racist.

The other demoralizing ploy of American-owned corporations is to assert that Americans are just...too....”unskilled” for the jobs they offshore and outsource to save money or to shift more profit to the top executives and shareholders.

Cynical, manipulative elites mock Deplorables—or do it in a sneakier, non-condescending style, like Bill Clinton did when the initial policy decisions were being made—reminding the citizens of their own countries how “unskilled” they are, as they ship jobs off for profiteering reasons to countries that are still mostly rural, where hordes of cheap-labor workers are trucked in to the city dormitories in the case of China, and a few highly educated elites congregate in the cities—just like here, just like everywhere. 

 

In reply to by FreeMoney

Jack Oliver gdpetti Wed, 06/27/2018 - 22:40 Permalink

Mother Nature is NOT doing it - frequency ( manipulation of the resonant frequency of the earth and jet stream being manipulated with frequency ) IS DOING IT !! 

The are in the age of weather warfare - Nikola Tesla discovered this !! 

Resonant frequency comes from the earths core - every 1 hour 48 minutes ( just like ‘old faithful’ ) push that frequency back and it creates earthquakes !! 

In reply to by gdpetti

GoldmanSax rejected Wed, 06/27/2018 - 17:24 Permalink

He puts out a lot of info that no one can act on. He also did nothing for freedom when he mattered. He helped the CFR undermine freedom. He also laughs like the audience is so dumb for not knowing the old info he is re-releasing. I also cant stand the sound of the gooey substance in his mouth when he speaks. Everyone is free to listen to who they want. This is fight club.

In reply to by rejected

el buitre GoldmanSax Wed, 06/27/2018 - 19:23 Permalink

Most of the people on this site already know what Roberts just summarized.  Other than referring to the Fed as a government agency rather than a private corporation, he was mainly correct in what he wrote.  Most of the American sheeple do not.  They do know that they were sold out, but they don't know the details; how, why, by whom.  It's common knowledge that the people's gold was stolen by the Bush and Clinton crime families along with Robert Rubin.  There is a persistent rumor out that Trump is in the process of successfully recovering it.  If China and Russia force the world back on a real gold standard and Trump's recovery is unsuccessful, the USA will be swimming naked when the tide goes out.

As to how long can the Fed keep their Ponzi going.  The answer would be a lot longer if they still controlled the planet.  But they no longer do and their bluff is being called right now by Putin, Xi and others.  As Göring wrote at his Nuremberg trial, "Truth is the enemy of the State."

In reply to by GoldmanSax

GoldmanSax Giant Meteor Wed, 06/27/2018 - 17:54 Permalink

I meant longer. Please to meet you too. We shouldn't always agree, but I typed before I thought. I have reasons to believe PCR is a shill. He pushes the fake east vs west when he knows the BIS holds everyone's cards. Everyone uses the same financial system and we are supposed to believe they are not working together? I put other reasons but you get the idea, I hope.

In reply to by Giant Meteor

Ron_Mexico rejected Wed, 06/27/2018 - 17:27 Permalink

Roberts should be the one explaining. He makes sweeping assertions like: " With the decline in income growth, the US economy stalled."  When exactly? What year are you talking about?  And he seemingly leaves out demographics completely in his analysis. He's just looking at everything through the lens of central banking, and when all you have is a hammer, everything tends to look like a nail.  I'm thinking that, like Rudy Giuliani, he lost his fastball a while back and maybe should just stick to writing about 1987.

In reply to by rejected

Rubicon727 rejected Wed, 06/27/2018 - 18:05 Permalink

Thank you, PCR, for returning to your expertise!

Finally, we have an economist who reveals the ugly truth behind what the criminal corporate class has done and is doing to America. See also Dr. Michael Hudson and his work.

As for Trump, I suspect he understands what's really going on, but a lot of his pals are billionaires involved in this corruption. Obviously, he can't name names otherwise, the 1% elite would eliminate his administration.

It may be that Trump is using the only "out" left in causing these tariff wars. If you read other online reports in China, Russia, a seldom few from the EU, you see enormous amounts of trade between China, Russia, Iran, Germany, and other Asian nations. This American senses we are being left in the dust by all this vitality.

It's recognized many multi-millionaire/billionaires in both the US & other parts of the world are making lots of money from the system.

However, I'm beginning to sense that ALL these US elites recognize the US financial system is deteriorating and there's no way to turn back.

It happens to every "empire" throughout history, but, other than about 10% of population who are informed, the real tragedy is about 80% of the American public who haven't a clue.

In reply to by rejected

Giant Meteor GoldmanSax Wed, 06/27/2018 - 17:21 Permalink

"With the decline in income growth, the US economy stalled. 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. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy."

"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 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."

Wash, rinse, repeat ...

In reply to by GoldmanSax

GoldmanSax Giant Meteor Wed, 06/27/2018 - 17:33 Permalink

Yes, It is wash, rinse, repeat but Glass Steagal is irrelevant. The criminaliy is the actual issue. Rules and regs are meaningless when the bankers are also in charge of the regulation. Another layer is the multinational corporations / banks that operate in between nations. What may be illegal in one jurisdiction is protected in another. Without a will to enforce, the crime is unstoppable.

In reply to by Giant Meteor

Giant Meteor TheEndIsNear Wed, 06/27/2018 - 18:39 Permalink

Well you do have a good point. Never sees the light of day so to speak. Sometimes the obvious escapes us all. That and living within ones own bubble, the thought bubble, effectively becoming as so many like to complain, controlled opposition.

These matters, are considered settled by the handlers, and is cause as well for Mr. Roberts frequent overuse of the word insouciant ..

What may seem obvious to many, is not even on the radar screen of a great many more ..

Thus, the circular firing squads ..

In reply to by TheEndIsNear