The lack of employment and real GDP growth go together with the decline in real household median income. The growth in consumer debt substituted for the lack of income growth and kept the economy going until consumers exhausted their ability to take on more debt. With the consumer dead in the water, the outlook for economic recovery is poor.
Politicians and the Federal Reserve are making the outlook even worse. At a time of high unemployment and debt-stressed households, politicians at local, state, and federal levels are cutting back on government provision of health care, pensions, food stamps, housing subsidies and every other elements of the social safety net. These cutbacks, of course, further reduce aggregate demand and the ability of income-stressed Americans to survive.
The Federal Reserve has interest rates so low that retirees and others living on their savings can earn nothing on their money. The interest rates paid on bank CDs and government and corporate bonds are lower than the rate of inflation. To live on interest income, a person has to purchase Greek, Spanish, or Italian bonds and run the risk of capital loss. The Federal Reserve’s policy of negative interest rates forces retirees to spend down their capital in order to live. In other words, the Fed’s policy is destroying personal savings as people are forced to spend their capital in order to cover living expenses.
In June the Federal Reserve announced that it was going to continue its policy of driving nominal interest rates even lower, this time focusing on long-term Treasury bonds. The Fed said it would be purchasing $400 billion of the Treasury’s 30-year bonds.
Driving interest rates down means driving bond prices up. With 5-year Treasury bonds paying only seven-tenths of one percent and 10-year Treasuries paying only 1.6%, below even the official rate of inflation, Americans desperate for yield move into 30-year bonds currently paying 2.7%. However, the the high bond prices mean that the risk of capital loss is very high.
The Fed’s debt monetization, or a drop in the exchange value of the dollar as other countries move away from its use to settle their balance of payments, could set off inflation that would take interest rates out of the Fed’s control. As interest rates rise, bond prices fall.
In other words, bonds are now the bubble that real estate, stocks, and derivatives were. When this bubble pops, Americans will take another big hit to their remaining wealth.
It makes no sense to invest in long-term bonds at negative interest rates when the federal government is piling up debt that the Federal Reserve is monetizing and when other countries are moving away from the flood of dollars. The potential for a rising rate of inflation is high from debt monetization and from a drop in the dollar’s exchange value. Yet, bond fund portfolio managers have to follow the herd into longer term maturities or see their performance relative to their peers drop to the bottom of the rankings.
Some individual investors and foreign central banks, anticipating the dollar’s loss of value, are accumulating gold and silver bullion. Realizing the danger to the dollar and its policy from the rapid rise in the price of bullion during 2011, the Federal Reserve has arranged offsetting action. When the demand for physical bullion drives up the price, short sales of bullion in the paper market are used to drive the price back down.
Similarly, when investors begin to flee Treasuries, thus causing interest rates to rise, J.P. Morgan and other dependencies of the Federal Reserve sell interest-rate swaps, thus offsetting the effect on interest rates of the bond sales. (Keep in mind that interest rates rise when bond prices fall and vice versa.)
The point of all this information is to establish that except for the 1 percent, the incomes and wealth of Americans are being cut back across the board. From 2002 through 2011, the economy lost 3.5 million manufacturing jobs. These jobs were replaced with lower-paying waitress and bartender jobs (1,189,000), ambulatory health care service jobs (1,512,000), and social assistance jobs (578,000).
These replacement jobs in domestic services mean that on a net basis US consumer income was moved out of the country. Potential aggregate demand in the US dropped by the differences in pay in the job categories. Clearly and unambiguously, jobs offshoring lowered US disposable income and US GDP and, thereby, employment.
Despite the lack of an economic base, Washington’s hegemonic aspirations continue unabated. Other countries are amused at Washington’s unawareness. Russia, China, India, Brazil, and South Africa are forming an agreement to abandon the US dollar as the currency for international settlement between themselves.
On July 4 the China Daily reported: “Japanese politicians and prominent academics from China and Japan urged Tokyo on Tuesday to abandon its outdated foreign policy of leaning on the West and accept China as a key partner as important as the United States. The Tokyo Consensus, a joint statement issued at the end of the Beijing-Tokyo Forum, also called on both countries to expand trade and promote a free-trade agreement for China, Japan and South Korea.”
This means that Japan is in play.
The Chinese government, more intelligent than Washington, is responding to Washington’s military threats by enticing away Washington’s two key Asian allies. As the Chinese economy is now as large as the US and on far firmer footing, and as Japan now has more trade with China than with the US, the enticement is appealing. Moreover, China is next door, and Washington is distant and drowning in its hubris.
Washington, which flicked its middle finger to international law and to its own law and Constitution with its arrogance and gratuitous and illegal wars and with its assertion of the right to murder its own citizens and those of its allies, such as Pakistan, has made the United States a pariah state.
Washington still controls its bought-and-paid-for NATO puppets, but these puppet states are overwhelmed with derivative debt problems brought to them by Wall Street and by sovereign debt problems, some of which were covered up by Wall Street’s Goldman Sachs.
Europe is on the ropes and has no money with which to subsidize Washington’s wars of hegemony.
Washington is becoming an isolated and despised element of the world community. Washington has purchased Europe, Canada, Australia, the former Soviet state of Georgia (and almost Ukraine), and Columbia, and continues its effort to purchase the entire world, but sentiment is turning against the rising Gestapo state that has shown itself to be lawless, ruthless, and indifferent, even hostile, to human life and human rights.
A government, whose military was unable with the help of the UK to occupy Iraq after eight years and was forced to end the conflict by putting the “insurgents” on the US military payroll and to pay them to stop killing American troops, and a government whose military has been unable to subdue a few thousand lightly armed Taliban after 11 years, is over the top when it organizes war against Iran, Russia, and China.
The only prospect Washington has of prevailing in such an undertaking is first use of nuclear weapons, of catching its demonized opponents off guard by nuking them out of the blue. In other words, by the elimination of life on earth.
Is this Washington’s program revealed by the neoconservative warmonger, Bill Kristol, who had no shame to ask publicly: “What’s the good of nuclear weapons if you can’t use them?”
It is now obvious that for America it is economic collapse or war. Reading between the lines Hilary Clinton made this clear in Paris last Friday. She also made clear that her preferred option is war when she threw down the gauntlet at the “Friends of Syria Group” meeting in Paris to Russia and China and insisted that the other countries at the meeting take the side of the Americans.
“I don’t think Russia and China believe they are paying any price at all, nothing at all, for standing up on behalf of the Assad regime,” she said. “The only way that will change is if every nation represented here directly and urgently makes it clear that Russia and China will pay a price. Because they are holding up progress, blockading it. That is no longer tolerable.” Hilary Clinton – Paris 6 July 2012…
And as (I gather) there were about 100 countries represented at these meeings it must be assumed that these countries are being bullied into going to war on the American side against Russia and China.
Hey Hilary, that’s fine, as long as Chelsea is signing up for active duty immediately. For that matter, any person holding public office who votes for war should be required to send their own children to fight that war.
You forgot to mention there are actually
more than 40% of the people some extremely
stupid wanting 4 more year of this….
You would think someone could count 3+3 = 6
UNITED STATES ARE WALKING FOR THE MISSION OF ULTIMATE DECAY AFTER THAT USA WILL LOST IS NAME IN THE P5.CHINA RUSSIA, INDIA ARE ALL WATHING
USA SHOULD BE MORE RESERVED TO PROTECT ITS HONOUR
Sadly, there is very little honorable here in the US to defend or protect, all that was good has been cast off in favor of profits, power and pollution of the world with war!
Reading this piece (an excellent one, by the way) led me to check once more comments on “Can the World Survive Washington’s Hubris”, whereupon I saw your own comment about my criticism of the “frankness” you employ in your columns. To clarify my own view, it’s not frankness or even harsh judgements that I think are counterproductive, but what I see as over-the-top language — go to my previous comments on this subject for examples. As I see it, hyperbole and ad hominem attacks detract from the force of your arguments, and thereby reduce your influence.
You speak in your comment about your influence being at a peak. I don’t follow the foreign press to anything like the extent I do the US media, so perhaps your influence overseas is indeed growing. But here in the US — and the US is still the most important actor in world politics — I never see your writing in publications that are read by those with influence, be it the Times, the Journal, Foreign Affairs, etc. Nor do I see you on network or cable news programs, or even hear your views quoted. Of course many of the views you espouse (some of which I share) are very much out of favor with the political and media elites. That being so, it’s hard to get exposure in mainstream forums. However, you would have a better chance (in my opinion) of getting mainstream exposure (i.e, bringing your case before a wider American audience) if you toned down the rhetoric.
Uou obviously have every right to do and say what you please. I just happen to think that you reduce your influence (at least in America) by being so fierce in language and opinion. And I think that’s a shame, since your background and ideas could make you a much stronger force for change. That’s my view, anyway.
“….and the US is still the most important actor in world politics”
Not any more it would appear. I seems that no one has risen to Hilary’s rallying cry to threaten Russia and China that they “will pay a price”.
“…you would have a better chance … of getting mainstream exposure … if you toned down the rhetoric.” Do you mean that the truth is so unpalatable that it must be made “politically correct” to get people to listen to it.
Jon, you would do well to look elsewhere for your ‘news’ as you call it, since without exception, the media in all its forms in the US, is controlled, filtered, purposefully myopic and totally ‘in-lock-step’ with the government, rather than acting as a check on the out of control Executive, Legislative and Military systems we have in place at this time.
Peter, if you had read my comment more carefully you might have seen that I wasn’t talking about the state of the U.S. media. Although you overstate somewhat, I pretty much agree with your characterization of that media. However, that wasn’t the issue I was addressing in my comment. Trust me, I don’t need to be told what the state of US news reporting is.
“Do you mean that the truth . . . must be made ‘politically correct’ to get people to listen to it” — I wouldn’t go that far, but I would say that ad hominem attacks and stretching the truth hurt the cause. If one calls Obama a madman, for example, a significant portion of readers will not take seriously whatever else one has to say. If one claims that “millions of Muslims” have been killed by the US since 9/11, you have a problem with the facts. The truth is bad enough: probably 200,000 dead in Iraq, and some thousands more in Afghanistan, Pakistan, Libya. etc. The fact remains that “millions” is an unpardonable exaggeration that damages the credibilty of the person who makes it.
This is a problem that’s by no means confined to this interesting and often on the money site. Like-minded people who hold minority opinions and share them largely amongst themselves generally end up indulging in emotion-laden language that carries them beyond known facts. Largely powerless to affect events, they fall prey to what Nietzsche called “ressentiment”, with the result that their views are further marginalized, or at least fail to find a hearing before mainstream audiences. Thus their influence cannot grow — a vicious circle, as it were.
As for US influence in the world, I didn’t claim that the US gets its way all the time. Nevertheless, it’s still the most important actor. No power has ever gotten its way in every situation it happens to involve itself in. The implication of your comment is that because the US is not getting Russian and Chinese cooperation in Syria, it cannot be the most important actor in world politics. That’s a mistake of logic on your part. I assure you, if you go to Moscow or Beijing, they will acknowledge that the US is the most important single actor in the world. How long that will continue is another matter — but that particular subject is not germane to what we are discussing right now.
Calling for a bond bubble, is frankly stupid.
1. Bubbles burst.
2. Bonds mature. The only possible “bond bubble” would be the result of the debtor not being able to pay. So there are examples. GM bond holders saw their bonds burst in value as the government saw fit not to honor the bond holder’s rights (covenants) and reward the union. Ain’t socialism great?
3. If one holds a ten year US Government bond and bought it yielding 1.80% and the US Government honors its obligations, unlike what they did for the GM bond holders, then in ten years the investor will get 100 cents on the dollar and have earned a whopping 1.80%. However the 1.80% if it is yield to maturity, then the calculation assumes a reinvestment rate equal to the YTM or 1.80%. So if you want to be technical about it the final rate of return would depend upon what rate the interest payments are reinvested.
If people really mean bubble, in that situation I think one of the better places to hide would be the southern island of New Zealand, or possible being self sustaining deep in the mountains of Colorado.
Yes, “Calling for a bond bubble, is frankly stupid.” But that is exactly what Bernanke, et al, are calling for when they hold interest rates artificially low for so long.
If the issuer is money good, one will eventually get their investment back and that to me is not a bubble.
The amount of time and attention spent on a bond bubble takes ones focus and concentration away from where it should be!
What Ben and Company have done, in all likelihood is to have created an environment that has provided the components necessary for the development of bubbles.
In my opinion, it is a question of trying to capitalize and/or avoid the bubbles created by the environment Ben and Company have created.
It is like one of the scams played on the streets of NYC. Guy has a hot dog. Sees what looks like a good mark going to walk buy. Goes to squirt mustard on his hot dog and squirts it on someone walking buy. With everything going on between the hot dog guy and the mark, he doesn’t notice that someone just took his wallet.
Ben is the hot dog guy and we are all worried about the mustard on our shirt when what we should be worried about is getting our pocket picked.
A statement which implicitly acknowledges that if the money of the issuer is not good and yet investors continue to purchase its debt, then its bonds are in a bubble.
The fallacy of your argument is its assumption that the U.S. will make good on its debts. It will not. The entire U.S. Federal Reserve monetary system is a Ponzi scheme. One way or the other, the U.S. will default, most likely through inflation.
Jeremy, if you believe that then I would suggest you join me in the mountains of Colorado :)
It’s not a “belief”, it’s a fact. The mountains of Colorado sound nice.
I pointed out the possibility of national bankruptcy in the US back in 2006, when I started publishing articles about political economy. The US economy is so large and potentially productive that it would be possible to avoid default (through bankruptcy or inflation) even now IF proper measures were taken. This would entail a grand bargain involving public spending cuts (including the defense budget), entitlement reform, and real tax reform encompassing both the elimnation of most special breaks and loopholes, and a lowering of both individual and corporate tax rates. I would end too big to fail by breaking up the big banks, and do something about derivatives along the lines sketched out by Roberts. I would also like to see a program to rewrite all home mortgages at a 4 or 4 1/2 per cent interest rate, which would free up money for consumer spending.
Obama made a big mistake with the stimulus program in 2009, when he basically just threw cash at the economy. That program amounted to a thousand points of pork for the US Congress. Instead, a $1 trillion program to rebuild America’s infrastructure from top to bottom should have been enacted, even if many of the projects would not have been “shovel-ready” until 2011 or 2012. Such a program would actually have had the advantage of restoring our roads, bridges, etc. and getting a couple million unemployed construction workers off the dole. We would be reaping the benefits today, instead of bemoaning the fact that we threw away almost a trillion in cash.
It’s still not too late. Obviously nothing will happen until after the election. Then something will get done, though probably not enough to restore American prosperity.
Yes, IF they acted now. Which they aren’t, and aren’t going to. They aren’t going to make the spending cuts required to balance the budget, much less tackle the debt. People need to get their households in order and prepare for what’s coming, because the government isn’t going to fix it.
An economic collapse is the best thing that can happen in America and then we can put the guilty in a cage forever and start over
ROOT OF ALL USA’S PROBLEMS: A MISTAKE IN THE CONSTITUTION.
SOLUTION: NATIONAL REFERENDA
Thanks for the great article, Dr. Roberts. What is killing America is these wars and massive 3rd world immigration. The US is the 3rd most populous nation on earth, after China and India, yet it lets in more foreigners, 6 million per year, than the rest of the world combined. This flood of foreign labor is the root cause unemployment, falling wages and rising prices, according the basic law of economics: the law of demand and supply.
See US 3rd most populous nation:
http://en.wikipedia.org/wiki/List_of_countries_by_population
No country can provide such a high standard of living for so many people, for long. It has to become a 3rd world country, sooner or later.
When you see our “representatives” (who are our servants) take bribes and turn to crimes against their own nation, such as flooding the nation with aliens, engaging in illegal wars and we have to meekly beg our servants to stop their war on our nation, we know something is clearly wrong with our system.
The problem is that there are no binding national referenda in the United States. Many other countries, including 3rd world countries, have it, but not the US! Therefore America’s secret shame is that we do not have a real democracy! That is why American pseudodemocracy is a joke. Our criminal govt. must be ashamed going around the world preaching democracy but denying it to its own people!
The Constitution gave all the power to the 3 branches of govt. and assumed they will keep an eye on each other (“checks and balances”). The three branches have become corrupt, usurped power and are under the control of the Oligarchs.
But there is a solution to this govt’s war on the nation. It is a constitutional amendment to allow national referenda, so people can pass good laws in the national interest themselves. These laws will supersede laws passed by Congress and cannot be overturned except on constitutional grounds by a supermajority of both houses and unanimous vote of the Supreme Court. The people can then still override it by a 66% vote. Some believe that this right to amend the constitution is inherently vested in the American public. Others suggest an actual amendment. A survey showed that 76% of the public approved the idea.
We can pass a national referendum that all laws that affect the nation as a whole, such as raising taxes, large welfare programs, foreign aid, immigration, bailouts, and raising the debt ceilings, etc. can become law only if finally approved by the people. We will solve 90% of our problems this way.
For eg., see:
http://ni4d.us/index.htm
http://www.iandrinstitute.org/National%20I&R.htm
We Americans need to visit these websites, join these groups, contribute and call radio talk shows, etc. and promote this idea and get the process started soon, before it is too late.