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Work Until You're Dead?

More and more Americans are, and not by choice. They simply don’t have the means to survive otherwise. According to CNN, “Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings…50% have less than a three-month cushion and 27% had no savings at all….” (“76% of Americans are living paycheck-to-paycheck“, CNN Money)

“No savings at all”?

That’s right. So retirement is out of the question. A sizable chunk of the adult population is going to punch a clock until they keel-over in the office parking lot and get hauled off in the company dumpster. And those are the lucky ones, the so called baby boomers. By the time we get to the millennials it’ll be even worse because the economy will have been ravaged by 25 or 30 years of austerity leaving the proles to scrape by on hardtack and gruel. Pensions are already being looted, Social Security is under fire, and any small stipend that supports the poor, the unemployed, or the infirm is going to be terminated. That’s why everyone is so down-in-the-mouth, because their expectations of the future are so bleak. Check this out from Business Insider:

“For millennials, the situation is even more grim. Compared to their parents at their age, the under-30 set is worth only half as much. And while this is a sobering reminder of the scale of the Great Recession’s impact on younger generations, it’s not the whole story. These households were actually falling behind even before the stock market and housing crash, researchers found.

Young people not only saw their wages stagnate or drop but also suffered a rise in fixed costs. They leave college with an average $27,000 debt load and have a harder time finding jobs that pay well, while facing more expensive health care and housing costs.

“If these generations cannot accumulate wealth, they will be less able to support themselves when unexpected emergencies arise or when they eventually retire,” the study authors said. “This financial uncertainty could reverberate throughout the economy, since entrepreneurial activity, saving, and investment tend to build on a base of confidence and growing wealth.”(“AMERICA IN DECLINE: Young People Are Much Worse Off Than Their Parents Were At That Age“, Business Insider)

An entire generation of young people have been raped and discarded by their government and all the author cares about is the impact it will have on personal consumption.

Go figure. And there’s a larger point here too, which is that Americans have always believed that their children would enjoy a higher standard of living than their own. Until now, that is. Now most people think things are going to get worse, much worse. You see it in all the surveys. Expectations have changed, the future looks darker than ever before, and people are scared. Check this out from CNN:

“Things appear to be looking up for the economy.

On Wednesday the Federal Reserve felt confident enough to begin slowly withdrawing the huge economic stimulus the central bank has been pumping into the economy.

Unemployment is the lowest in five years. Economic growth picked up recently. The housing sector — which got us into this mess in the first place — is bouncing back. Home sales, prices and construction are all on the rise.

Auto sales recently had their strongest growth since 2006. Gas prices have fallen dramatically this year, and the stock market has risen sharply.

And there’s some reason to be hopeful for next year too. The Fed announced a slightly improved outlook for unemployment in 2014.

But things aren’t always as good as they seem. For many Americans, all the good news in the larger economy isn’t translating over to everyday life. Only 24% of the public believe economic conditions are improving, while nearly four-in-ten say the nation’s economy is actually getting worse, according to a recent CNN poll.” (“Is the economy as good as it looks?“, CNN Money)

That’s right; no one is buying the “recovery” crappola any more. They all know it’s BS. And a closer look at the CNN survey tells you why.

“Looking specifically at the economy, 39% feel that the economy is still in a downturn, up six points from April. Only 24% believe that an economic recovery is under way. Thirty-six percent are in the middle – they don’t think we’re in a recovery but they believe conditions have stabilized.” (CNN Politics)

So, 3 out of 4 people think we’re either still in a severe slump or running in place.(stagnation) That’s your recovery in a nutshell. And it explains why people hate bankers, Wall Street, and Congress. It also explains why millennials have given up on Obama after finally acknowledging that the man is a bumptious blowhard who’s never lifted a finger to help the people who shoehorned his worthless keister into office. Take a look at this from Policy Mic:

“Debt-weary millennials are disillusioned with Obama’s performance with regard to the economy, the implementation of the Affordable Care Act, his handling of foreign relations”…

A new poll conducted by Harvard University’s Institute of Politics has revealed that young Americans’ support for President Barack Obama has reached the lowest point yet. According to the poll, only 41% of Americans aged 18-29 approve of Obama’s performance in office, an 11% drop since April.” (“Millennials officially hate Obama. Here’s why“, policymic)

Ahhh, so people are finally waking up to what an unprincipled phony this guy is. Good!

Unfortunately, ripping Obama won’t pay the bills, which is why so many people are making painful adjustments in their own lives to make ends meet. Aside from cutting back on trips to the doctor and setting the thermostat on “Off”, America’s plenteous graybeards are staying on the job longer than ever. Here’s a clip from an article in Forbes:

“An alarming 37% of middle class Americans believe they’ll work until they’re too sick or until they die.

Another 34% believes retirement will come at the ripe age of 80…

It’s a grim look at the state of retirement which seems to be getting worse for middle class Americans.

Wells Fargo WFC -0.09% interviewed 1,000 Americans between age 25 and 75 and with household income ranging between $25,000 and $99,000. More than half (59%) said their top day-to-day financial concern is paying the monthly bills; that’s up from 52% who said the same last year.

“We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years,” Laurie Nordquist, head of Wells Fargo Institutional Retirement and Trust, says in the report.

And here’s something for leaders in Washington DC to consider: One third of those surveyed said their primary source of retirement income will come from social security. That figure gets even bigger for those who make less than $50,000–48% of those earners say social security is going to be their primary retirement income.” (“Work Until You Die? More Middle Class Americans Say They Can Never Retire“, Halah Touryalai, Forbes)

How do you like that, eh? So nearly half the people who make less than $50,000 are counting on Social Security as their “primary retirement income.” At the same time, our old buddy Obama is planning to cut Social Security to keep his criminal friends on Wall Street happy.

That means a whole lot of us are going to be stuck bussing tables at Olive Garden until they carry us out feet first.

Your doing a hechuva job, Barry!

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Social Security
While Housing Sales Slow

10-year Treasuries veered into the danger zone on Friday as yields broke through the crucial 3 percent barrier signaling a slowdown in housing sales due to higher mortgage rates. Fixed rate mortgages are expected to edge higher even though the rate on the 30-year loan increased to 4.48 percent just days earlier. The Fed’s announcement to scale back on its $85 billion per month asset purchases has triggered a selloff in long-term Treasuries that will further constrain lending, shrink the pool of potential homebuyers, and turn a mild slowdown to a protracted slump.

Keep in mind, that the Fed is already buying nearly all of the newly issued mortgage-backed securities (MBS), but even that radical market intervention is having no noticeable impact on interest rates. Take a look at this from the Wall Street Journal:

“The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year…

The Fed’s reach has been enhanced by its practice of reinvesting the proceeds of its maturing mortgage bonds in its $1.48 trillion portfolio, adding another $15 billion to $20 billion in new monthly mortgage-bond purchases.

The Fed has increased its holdings by $553 billion over the past year. It is on pace to add another $220 billion in purchases in 2014, according to estimates from Credit Suisse.” (“The Fed’s Mortgage Role Expands“, Wall Street Journal)

There is no market for MBS except for the Fed.

On top of that, the Fed is reinvesting the money it takes in on maturing MBS to buy more of this unsellable garbage which adds another $15 or $20 billion to the monthly total.

“15 billion here, $20 billion there. Pretty soon, you’re talking real money.”

And all of this is being piled on to the Fed’s bloated $4 trillion balance sheet. (which no one has any idea of what to do with.)

The purpose of the policy is push down long-term interest rates, which it doesn’t do. In fact, as we pointed out earlier, rates are rising while conditions in the housing market are going from bad to worse. For example, existing home sales tanked for the third month in a row in November to a seasonally adjusted annual rate of 4.9 million. November’s sales pace was the slowest in more than a year, which means that higher rates and rising prices are scaring off potential buyers. There are also signs that institutional investors, which represented 50% or more of previous sales, are cutting back on their purchases due to the deteriorating rate environment. Take a look at this brief summary by housing analyst Mark Hanson:

“Las Vegas housing demand has crashed. …This is not hyperbole. “Crashed” is absolutely the appropriate word to use here given sales are suddenly the weakest levels since Armageddon 2009. I mean come on…sales at the same pace as when the stock market was in the midst of one of the greatest plunges in history speaks loudly…at least to me…

… Like Sacramento, Phoenix, regions in the Inland Empire, and a dozen other “hot” real estate markets around the nation…..when the stimulus go-go juice ran out this market hit a literal “brick wall” the size of 2007…” (“Las Vegas Housing Demand Has Crashed While Supply Surging“, Mark Hanson via zero hedge)

When Hanson talks about “stimulus go-go juice”, he’s referring to the Fed’s rate stimulus which evaporated in June when Bernanke announced his intention to “taper” his asset purchases (QE). That led to a frenzied month of bond trading which pushed up yields on long-term USTs more than 100 basis points. The higher rates have put a damper on sales while mortgage applications have plunged to a 13 year low. For all practical purposes, the recovery is kaput.

Here’s an update from Phoenix which had been “red hot” for more than a year:

“The Phoenix-area housing market is quietly ending the year, with a drop in demand and activity… Demand is rapidly dropping, and the supply of homes available for sale is quickly rising…

First-time home buyers, especially those under 30, are showing little interest in getting into the market…

“I anticipate sales will be way down in November and through the holidays, when some people even take their homes off the market until late January,” says Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business…

Investors and out-of-state buyers are also losing interest in the Phoenix area. The percentage of residential properties purchased by investors has dropped from the peak of 39.7 percent in July 2012 down to 22.6 percent this October. The percentage of Maricopa County homes sold to out-of-state buyers was down from 20.1 last October to 16.4 this October. That’s the lowest percentage since January 2009.” (“Phoenix housing-market activity quiets down for end of year“, Sonora News)

It’s the same story all over southern California where housing prices had been soaring but hit the skids shortly after the Fed made its announcement. This is from DQ News:

“Southern California’s housing market downshifted last month, with sales falling well below a year earlier as investor activity waned again and buyers continued to struggle with higher prices and a thin supply of homes for sale…

A total of 17,283 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 14.2 percent from 20,150 sales in October, and down 10.4 percent from 19,285 sales in November 2012, according to San Diego-based DataQuick….Last month’s sales were 19.8 percent below the average number of sales – 21,559 – in the month of November.” (“Southland Home Sales Drop; Median Sale Price Edges Sideways – Again“, DQ News)

So what’s really going on in the housing market? Is the sudden jolt in mortgage rates really that big a deal or is the market just taking breather before its next stratospheric surge?

Mark Hanson believes the situation is quite dire and explains why in a “must read” post on his blogsite. Here’s a clip from his article:

“House prices are down 26% from peak 2006. But it costs 12% MORE on a monthly payment basis to buy today’s house…..Houses have not been MORE EXPENSIVE” on a monthly payment basis in 11 years, right before when exotic loans were introduced to promote affordability…..” (12-17 Housing ‘Bubble 2.0′; Same as ‘Bubble 1.0′, Only Different Actors, Mark Hanson)

But how can that be, you ask, when rates are just 4.5% and home prices are still way below their peak in 2007?

It’s because the types of mortgages that were issued during the boom –all those “exotic, high-leverage, no documentation loans”–allowed borrowers to fake their income and make small monthly payments on obscene amounts of money they would never be able to repay. Keep in mind, interest rates actually rose in 2003, but that didn’t stop the bubble from inflating for 4 more years because lending standards were so ridiculous.

As Hanson notes:

“from 2003 to 07 mortgages were much cheaper on a monthly payment basis than ever before in history and ever have been since. (And it was all due to)…..exotic lending (that) made it so people could keep buying more expensive houses and refinancing at higher loan amounts on income that didn’t support it…”

Hanson draws a comparison between the Fed’s rate stimulus (from 2011 to 2013) to the crappy underwriting which created the housing bubble.(from 2003 to 2007) That’s why he expects the “reset” to be “one for the record books”.

Indeed. The impact of rising rates is already visible in the dismal sales and mortgage applications data. It’s only a matter of time before institutional investors call it quits and prices begin to fall.

Here’s a chart from Hanson’s blog. The sudden spike in interest rates has reduced “affordability” putting home ownership out of reach for many potential buyers.

CA Med Price and Payment using popular loan progs – Bar vs Lone chart

CA Med Price and Payment using popular loan progs - Bar vs Lone chart Read the whole post here.MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Housing
Slip Sliding Away

According to a new Washington Post-ABC poll, Barack Obama now ranks among the least popular presidents in the last century. In fact, his approval rating is lower than Bush’s was in his fifth year in office. Obama’s overall approval rating stands at a dismal 43 percent, with a full 55 percent of the public “disapproving of the way he is handling the economy”. The same percentage of people “disapprove of the way he is handling his job as president”. Thus, on the two main issues, leadership and the economy, Obama gets failing grades.

An even higher percentage of people are upset at the way the president is implementing his signature health care system dubbed “Obamacare”. When asked “Do you approve or disapprove of the way Obama is handling “implementation of the new health care law?” A full 62% said they disapprove, although I suspect that the anger has less to do with the plan’s “implementation” than it does with the fact that Obamacare is widely seen as a profit-delivery system for the voracious insurance industry. Notwithstanding the administration’s impressive public relations campaign, a clear majority of people have seen through Obama’s health care ruse and given the program a big thumb’s down.

Of course, Obamacare is just the straw that broke the camel’s back. The list of policy disasters that preceded this latest fiasco is nearly endless, including everything from blanket pardons for the Wall Street big-wigs who took down the global financial system, to re-upping the Bush tax cuts, to appointing a commission of deficit hawks to slash Social Security and Medicare (Bowles-Simpson), to breaking his word on Gitmo, to reneging on his promise to pass Card Check, to expanding to wars in Africa, Asia and the Middle East, to droning 4-times as many civilians as the homicidal maniac he replaced as president in 2008.

Obama’s treatment of undocumented immigrants has been particularly shocking although the details have been kept out of the media, presumably because the news giants don’t want to expose the Dear Leader as a heartless scoundrel who has no problem separating mothers from their children, locking them up in privately-owned concentration camps and booting them out of the country with nothing more than the shirt on their back. Check out this blurb which sums up Obama’s “progressive” immigration policy in one paragraph:

“Obama is on track to deport 3 million immigrants without papers by the end of his second term, more than any other president. George W. Bush deported about 2 million over two terms. Obama will likely hit that mark this month….. The average daily count of immigrants in detention now is about 33,000. In 2001, it was 19,000. In 1994, it was 5,000, according to the Detention Watch Network. Almost all of the detainees and deportees are Latino. True, the population of illegal immigrants has also doubled in that time to more than 11 million. But the detainee and deportee counts have escalated more than twice as fast.

“He could go down as the worst president in history toward immigrants,” said Arturo Carmona, executive director of the liberal activist group

Hooray for the Deporter in Chief! You’re Numero Uno, buddy. You even beat Bush! Is it any wonder why the man’s ratings are in freefall?

All told, Obama has been bad for the economy, bad for civil liberties, bad for minorities, bad for foreign wars, and bad for health care. He has, however, been a very effective lackey-sock puppet for Wall Street, Big Pharma, the oil magnates, and the other 1% -vermin Kleptocrats who run the country and who will undoubtedly attend his $100,000-per-plate speaking engagements when he finally retires in comfort to some gated community where he’ll work on his memoirs and cash in on his 8 years of faithful service to the racketeer class.

But, let’s face it; no one really gives a rip about “drone attacks in Waziristan” or “hunger strikes in Gitmo”. What they care about is keeping their jobs, paying off their student loans, putting the food on the table or avoiding the fate of next-door-neighbor, Andy, who got his pink slip two months ago and now finds himself living in a cardboard box by the river. That’s what the average working stiff worries about; just scraping by enough to stay out of the homeless shelter. But it’s getting harder all the time, mainly because everything’s gotten worse under Obama. It’s crazy. It’s like the whole middle class is being dismantled in a 10-year period. Wages are flat, jobs are scarce, incomes are dropping like a stone, and everyone’s broke. (Everyone I know, at least.) Did you know that 76% of Americans are living paycheck-to-paycheck. Check it out:

“Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings, according to a survey released by Monday.

Fewer than one in four Americans have enough money in their savings account to cover at least six months of expenses, enough to help cushion the blow of a job loss, medical emergency or some other unexpected event, according to the survey of 1,000 adults.

Meanwhile, 50% of those surveyed have less than a three-month cushion and 27% had no savings at all….

Last week, online lender CashNetUSA said 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn’t enough money left over for saving more.”


Are you kidding me? What’s that? Who do you know that’s able to save money in this economy? Maybe rich uncle Johnny whose lived on canned sardines and Akmak for the last 50 years, but nobody else can live like that. Subtract the rent, the groceries, the doctor bills etc, and there’s barely enough leftover to fill the tank to get to work on Monday. Saving just isn’t an option, not in the Obamaworld, that is.

Now check this out from Business Insider:

“Thousands of Americans aged 55 and older are going back to school and reinventing themselves to get an edge in a difficult labor market, hoping to rebuild retirement nest eggs that were almost destroyed by the recession….

According to the Federal Reserve, household financial assets, which exclude homes, dropped from a peak of $57 trillion in the third quarter of 2007 to just over $49 trillion in the fourth quarter of last year, the latest period for which data is available.

A survey to be released this summer by the Public Policy Institute of AARP, an advocacy group for older Americans, found a quarter of Americans 50 years and older used up all their savings during the 2007-09 recession. About 43 percent of the 5,000 respondents who took part in the survey said their savings had not recovered.” (“Unemployed Baby Boomers Are Getting Hired By Going Back To School”, Business Insider)

Sure they’re going back to work. What do you expect them to do? They’re broke! They got wiped out in Wall Street’s mortgage laundering scam and they’re still behind the eightball five years later. And what’s left of the money they set aside for retirement is yielding a big zilch thanks to the Fed’s zero rate policy which is forcing people back into another decade of penal servitude at minimum wage. That’s why you see so many hunched over graybeards in red vests with “Happy to Serve You” splattered on their chests lugging shopping bags out to the cars for old ladies. Because they’re broke and out of options. Everyone knows someone like this unless, of course, they’re one of the fortunate few who make up the Nobel 1%; aka–The Job Cremators. Then they don’t have to fret about that sort of thing.

Here’s another gem you might not have seen in USA Today a few months back:

“Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.

Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor, and the loss of good-paying manufacturing jobs as reasons for the trend….

Hardship is particularly growing among whites, based on several measures. Pessimism among that racial group about their families’ economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63% of whites called the economy “poor.”

“I think it’s going to get worse,” said Irene Salyers, 52, of Buchanan County, Va., a declining coal region in Appalachia. Married and divorced three times, Salyers now helps run a fruit and vegetable stand with her boyfriend, but it doesn’t generate much income….

Nationwide, the count of America’s poor remains stuck at a record number: 46.2 million, or 15% of the population, due in part to lingering high unemployment following the recession. While poverty rates for blacks and Hispanics are nearly three times higher, by absolute numbers the predominant face of the poor is white…

“Poverty is no longer an issue of ‘them’, it’s an issue of ‘us’,” says Mark Rank, a professor at Washington University in St. Louis who calculated the numbers. “Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need.” (“4 in 5 in USA face near-poverty, no work”, USA Today)

Does Obama have any idea of the damage he’s doing with his Rich-First policies? The country is in a terrible state and yet Obama continues to approve bills that throw millions of people off unemployment benefits, sharply cut government spending, or undermine vital safetynet programs that keep the sick and the elderly from dying on the streets. It’s like he’s trying to reduce 300 million Americans to grinding third world poverty in his short eight-year term. Is that the goal?

Did you know that–according to Gallup–20.0% of all Americans did not have enough money to buy food that they or their families needed at some point over the past year? Or that –according to a Feeding America hunger study–more than 37 million people are now using food pantries and soup kitchens? Or that one out of six Americans is now living in poverty which is the highest level since the 1960s? Or that the gap between the rich and poor is greater than any in history?

Everything has gotten worse under Obama. Everything. And, not once, in his five years as president, has this gifted and charismatic leader ever lifted a finger to help the millions of people who supported him, who believed in him, and who voted him into office.

These latest poll results indicate that many of those same people are beginning to wake up and see what Obama is really all about.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
America's Missing Investors

Guess who’s investing in America’s future?

Nobody, that’s who.

Just check out this excerpt from an article by Rex Nutting at Marketwatch and you’ll see what I mean. The article is titled “No one is investing in tomorrow’s economy”:

“The U.S. economy simply isn’t investing enough to ensure that there will be enough good paying jobs for our children and our children’s children. Net investment — the amount of capital added to our stock — remains at the lowest levels since the Great Depression. …

Net investment…measures the additional stock of buildings, factories, houses, equipment, software, and research and development — above and beyond the replacement of worn-out capital. In 2012, net fixed investment totaled $485 billion, only about half of the $1.1 trillion invested in 2006…

If businesses, consumers and governments were investing for the future at usual rate, the economy would be at least 3% larger, employing millions more people. That’s a huge hole in the economy that can’t be filled by heavily indebted consumers, especially at a time when government is handcuffed by forces of austerity.” (“No one is investing in tomorrow’s economy”, Rex Nutting, Marketwatch)

Now the author seems to believe that the lack of net investment is just a temporary phenom that will work itself out in the years ahead. But he could be wrong about that. After all, why would a company build up its capital stock for the future when the future is so uncertain? Certainly, there’s nothing in the data that would suggest that the US economy is about to shake off its five year post-recession funk and shift into high-gear again, is there? No, of course not. In fact, it looks like the economy has reset at a lower level of activity that will only get worse as the impact of budget cuts and stagnation are felt. That will further curtail consumer spending which, to this point, had been the primary driver of growth.

Bottom line: Net investment is down because there’s no demand. And there’s no demand because unemployment is high, wages are flat, incomes are falling, and households are still digging out from the Crash of ’08. At the same time, the US Congress and Team Obama continue to slash public spending wherever possible which is further dampening activity and perpetuating the low-growth, weak demand, perma-slump.

So, tell me: Why would a businessman invest in an economy where people are too broke to buy his products? He’d be better off issuing dividends to his shareholders or buying back shares in his own company to push stock prices higher.

And, guess what? That’s exactly what CEOs are doing. Check this out in the Washington Post:

“Battered by months of dis­appointing sales, networking giant Cisco needed a way to give its shareholders a pick-me-up. So the San Jose-based firm did what has become routine for many big U.S. companies in a slow-growing economy: It announced last month that it was buying back shares of its stock…..

This is what U.S. multinationals do now with their cash. Rather than tout big new investments, raise worker wages or hire more employees, companies are more likely to set aside funds to reward shareholders — a trend that took a dip during the recession but has roared back during the recovery.

The 30 companies listed on the Dow Jones industrial average have authorized $211 billion in buybacks in 2013, according to data from ­Birinyi Associates, helping to lift the benchmark stock index to heights not seen since the tech boom of the late 1990s. By comparison, the amount is nearly three times what the group spent on research and development last year, according to data from S&P Capital IQ.

Why spend so much on stock repurchasing?

When the number of shares outstanding falls, the value of each one goes up, instantly rewarding shareholders.” (“Companies turning again to stock buybacks to reward shareholders”, Washington Post)

Corporations don’t care about the future. What they care about is maximizing shareholder value, that’s the name of the game; profits. If that means boosting net fixed investment then, okay, that’s what they’ll do. But if the Fed creates incentives to do something else, like gaming the system with stock buybacks, then they can make the adjustment. And that’s what the Fed’s zero rate policy does. It’s incentivizes businesses to use their capital in a way that’s damaging to the real economy. Here’s more from the same article:

“Helping to fuel the stock market’s meteoric rise is the Federal Reserve’s stimulus program designed to lower borrowing costs. Companies are taking advantage, often by borrowing money at low rates to repurchase shares, although it’s unclear how much of the debt is being used to pay for buybacks.

“It somehow feels scarier if they borrowed the money to buy back stock than if they had some investment opportunities,” Inker said. “That somehow seems more sustainable than just levering up to reduce the share count.”

Some analysts say companies are better off repurchasing shares than pouring money into investments promising dubious payoffs, especially in a slow-growing economy.” (“Companies turning again to stock buybacks to reward shareholders”, Washington Post)

There you have it; instead of investing in R&D, factories or new technologies, (all of which produce more high-paying jobs) companies are taking advantage of the Fed’s cheap money, goosing stock prices and raking in hefty profits. That’s just the way the policy works. The only way change the outcome, is to change the incentives. But the Fed doesn’t want to do that, and neither does the Congress because, at present, they have working people right where they want them, under their bootheel.

If you are looking for proof that workers are getting shafted, just look at the condition of the US consumer who is still on the ropes 5 years after the recession ended. Now, according to the latest Fed’s Flow of Funds report, “Household net worth rose by $1.9 trillion in the last quarter” which means that everything should be hunky dory, right? It means the long period of deleveraging should be over and consumers should be ready to go on another madcap spending spree like they did up-until 2007. Unfortunately, the Fed’s report is a bunch of baloney. The $1.9 trillion merely accounts for rising asset prices that have been reflated by Bernanke’s quantitative easing boondoggle. While working people have seen some uptick in housing prices, the bulk of the gains have gone to stock and bond speculators who’ve made out like bandits. As for consumers, well, they’re still stuck in the doldrums as economist Stephen S. Roach points out in this article at Project Syndicate. Here’s a clip:

“In the 22 quarters since early 2008, real personal-consumption expenditure… has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.” (It’s also a) “massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.” (“Occupy QE“, Stephen S. Roach, Project Syndicate)

So, personal consumption has dropped from 3.6% to 1.1%?!?

Yep. No wonder there’s no recovery. And, keep in mind, this is no short-term deal either, mainly because Democrats and Republicans are equally committed to future budget cuts which means it will be more difficult for households to get out of the red and resume spending. More austerity means more retrenchment and hard times for consumers, households and workers. Economist William R. Emmons provides a good summary of what’s-in-store for consumers in a recent post titled “Don’t Expect Consumer Spending To Be the Engine of Economic Growth It Once Was”. Here’s a clip from the article:

“Lower wealth: First and foremost, U.S. household wealth took a beating during the Great Recession. …., the loss of significant amounts of wealth and the severe pressure in some households to deleverage their balance sheets (reduce debt) are likely to contribute to restrained consumer spending for some time.

Stagnant incomes: The economic recovery under way since mid-2009 has been mediocre, at best. Job growth barely matches population growth, while incomes of the typical worker are barely keeping up with inflation. …, most of the overall gains in income appear to be flowing to high-income workers.

Tight credit: Consumer lenders either have disappeared altogether or are offering credit on a much more restricted basis than before the downturn.. …

Fragile confidence: Major consumer-confidence indexes have rebounded from their lowest levels during 2009 in the immediate aftermath of the recession, but they remain below the levels that prevailed just as the recession began in late 2008 …

Looming reversal of stimulus: The Federal Reserve has explored options to “exit” its extraordinarily accommodative monetary policy, while Congress and the president agree that budget consolidation is necessary in the not-too-distant future. In both cases, a tightening of policy measures represents a withdrawal of support for household incomes and wealth and, therefore, consumer spending.”

Individually, any of the five obstacles noted above might be surmountable. But combined, these contractionary forces make the outlook for broad-based consumer spending growth challenging. To be sure, some households weathered the economic and financial storms well, but we can’t count on these fortunate few to step up their spending sufficiently to offset the lost spending caused by declines in wealth, income, access to credit, confidence and government support.” (“Don’t Expect Consumer Spending To Be the Engine of Economic Growth It Once Was”, William R. Emmons, The Regional Economist |via The Big Picture

Emmons offers a bleak, but realistic assessment of our present predicament. There’s really no way the US economy can rebound without a dramatic reversal in the current fiscal policy. Most Americans appear to grasp this point which is why survey after survey show that the majority think the country is “on the wrong track”. The public’s frustration with Congress -(whose public approval rating is at all-time lows) is reflected in growing pessimism which is affecting their spending habits. This is completely normal, given that most middle income working people do not expect their financial situation to improve in the next year. Lower expectations mean more penny pinching, fewer job openings, skimpy net investment, and sluggish growth. That’s the future in a nutshell.

It’s worth noting that the investor class will also pay a heavy price for the current misguided policy. Stocks have had an impressive 4-year run, but there are signs that the day of reckoning is fast approaching. Get a load of this from USA Today:

“A potential warning to stock investors: the fourth-quarter earnings pre-announcement season is shaping up to be the most negative on record. In what seems like a major disconnect, the number of profit warnings relative to upbeat guidance is the widest it has ever been — at a time when the U.S. stock market is trading near record territory. The Standard & Poor’s 500 index notched a new closing high of 1809 Monday.

For every 10 companies warning of weaker-than-expected earnings for the October-through-December period, only one has said it will top forecasts, says earnings-tracker Thomson Reuters I/B/E/S. The actual 10.4-to-1 negative-to-positive pre-announcement ratio is on track to eclipse the prior record of 6.8 warnings for every positive one back in the first quarter of 2001. The long-term ratio is 2.3 warnings for each positive one.

“This is off the charts, I’ve never seen it this high,” says Gregory Harrison, analyst at Thomson Reuters.” (“As stocks hit record highs, so do profit warnings”, USA Today)

So why is Wall Street taking such dire warnings in their stride, you ask?

It’s because investors no longer pay attention to the fundamentals. Demand doesn’t matter. Earnings don’t matter. What matters is the Fed and the Fed alone. “Is Bernanke going to keep pumping trillions in liquidity into the financial markets or not?” That’s the policy upon which all investment decisions are made.

So when Bernanke announces his plan to “taper” his asset purchases (scale-back QE), equities will adjust accordingly.

Did somebody say “crash”?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
It's Closer Than You Think

“We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels… is increasingly likely that one event will be the catalyst to very rapidly change inflationary into deflationary expectations. Indeed, when key prices are already falling across the globe, one should expect one key major credit event to occur.” Russell Napier, “An Ill Wind”, CLSA, selected excerpts, zero hedge.

Deflationary pressures are greater today than anytime since the end of the recession in March 2009.

In September 2011 the annual rate of inflation was 3.9 percent. At present, the rate is just 1.0 percent and trending lower. Inflation has continued to fall despite five years of zero interest rates and 3 rounds of quantitative easing. For all practical purposes, the Fed’s large-scale asset purchases (LSAP) have had no impact on inflation at all, in fact, some analysts believe the Fed’s polices may be counterproductive. Take a look at this from Stephen Williamson’s New Monetarist Economics blog:

“Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn’t do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I’ve continued to work on these problems, and stuff has been happening. In particular, we’re not seeing that high-inflation path. How come?…

…with the nominal interest rate effectively at the zero lower bound, the rate of inflation is being determined primarily by the liquidity premium on government debt. Once we recognize that, it’s not surprising that the inflation rate has been falling for the last three years…

…In general, if we think that inflation is being driven by the liquidity premium on government debt at the zero lower bound, then if the Fed keeps the interest rate on reserves where it is for an extended period of time, we should expect less inflation rather than more…

The Fed is stuck. It is committed to a future path for policy, and going back on that policy would require that people at the top absorb some new ideas, and maybe eat some crow. Not likely to happen.” (“Liquidity Premia and the Monetary Policy Trap“, Stephen Williamson, New Monetarist Economics blog):


Williamson is not alone in his belief that the Fed is on the wrong track. Economist Warren Mosler arrives at the same conclusion although there are notable differences in their analysis. Here’s a short clip from an article by Mosler which wraps it up in one paragraph:

“Theory and evidence tell me it’s impossible for the Fed to create inflation, no matter how much it tries. The reason is because all the Fed does is shift dollars from one type of account to another, never changing the net financial assets held by the economy. Changing interest rates only shifts dollars between ‘savers’ and ‘borrowers’ and QE only shifts dollars from securities accounts to reserve accounts. And so theory and evidence tells us not to expect much change in the macro economy from these primary Fed tools, making it impossible for the Fed to create inflation.” (“It must be impossible for the Fed to create inflation“, Warren Mosler, Huffington Post)

The Fed is stuck in an ideological cul de sac mainly because its members ascribe to Bernanke’s monetary theories which simply don’t work. Here’s a clip from a speech the Fed chairman gave to the National Economists Club in 2002 that gives us a glimpse into his thinking:

“Under a fiat money system, a government… should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.” Ben S. Bernanke, “Deflation: Making Sure It Doesn’t Happen Here”, Federal Reserve, November, 2002

Okay, so where’s the inflation, Ben? The Fed’s 2 percent inflation target continues to move farther away the longer the Fed’s programs stay in place. Even more shocking is the fact that “The Fed’s preferred measure of U.S. inflation, the personal consumption expenditures deflator (PCE), showed last week that prices rose 0.7 percent in October, the least since 2009.” (Bloomberg) So even by the Fed’s own standards, QE and zirp have been a bust.

The reason for this is simple: QE does not raise inflation because QE does not increase incomes, wages or credit. The reserves that are created via QE remain in the banking system where they buoy asset prices by reducing the supply of stocks and bonds available for sale. But there is no transmission mechanism for delivering money to the real economy where it can increase activity, inflation and growth. The fact is, QE may actually be deflationary since it reduces the interest on bonds (US Treasuries) that provide income for savers and other fixed-income investors. Some analysts put the amount of potential savings lost due to QE in the neighborhood of $400 billion, which represents about half of all the money spent on Obama’s fiscal stimulus called the American Recovery and Reinvestment Act of 2009. Naturally, the loss of this revenue has only added to the sluggishness and stagnation of the US economy.

Economist Frances Coppola believes that QE is “deflationary rather than inflationary”, and makes the case in a recent post on her blog titled “Inflation, Deflation and QE”:

“Both UK and US governments believe that monetary tools such as QE can offset the contractionary impact of fiscal tightening. But this is wrong. Fiscal tightening principally affects those who live on earned income. QE supports asset prices, but it does nothing to support incomes. So QE cannot possibly offset the effects of fiscal tightening in the lives of ordinary working people – the largest part of the population. In fact because it seems to discourage productive corporate investment, it may even reinforce downwards pressure on real incomes. And when the real incomes of most people fall, so does demand for goods and services, which puts downward pressure on prices, driving companies to reduce costs by cutting hours, wages and jobs. This form of deflation is a vicious feedback loop between incomes, sales and consumer prices, which in my view propping up asset prices can do little to prevent.” (“Inflation, Deflation and QE”, Frances Coppola, Coppola Comment)

Coppola, who calls QE “one of the biggest policy mistakes in history,” backs up her claim with a number of charts and graphs which show how inflation fell during periods when central banks were buying sovereign bonds and boosting reserves at the banks. (Remember, the point of QE is to raise inflation expectations, not lower them.) Her repudiation of QE is further underscored by the fact that the so called “velocity of money” has dropped to a six decade low. Get a load of this graph from the St Louis Fed:


According to Investopedia the “velocity of money” means: “The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time…Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy’s inflation calculation.”

Bernanke knows that velocity is in the doldrums and that QE has had no meaningful impact on activity. Keep in mind, these are the Fed’s own charts. All the members of the FOMC are familiar with them and know what they mean. And what they mean is that the money is going no where; it’s stuck in the financial system goosing asset prices and providing needed balm for bloody bank balance sheets which are still deep in the red five years after Lehman Brothers collapsed. In other words, QE is working largely as it was designed to work. It is boosting profits for the financial sector while keeping the real economy in a permanent slump. As long as the economy underperforms, the Fed will have a reason to continue the existing policy. If, however, the economy gains momentum and inflation rises, the Fed will be forced to wind down its asset purchases and raise rates cutting off the flow of interest-free money to the banks. Thus, the Fed’s strategy requires that the US Congress and the White House continue to shave the deficits, curtail public spending and implement other belt-tightening measures to make sure the economy does not rebound and upset the Fed’s plan to continue its wealth transfer to Wall Street.

This sounds easier than it is, in fact, the droopy rate of inflation suggests that Bernanke may already be too close to the cliff-edge to pull back in time. Credit growth, personal consumption, wages and incomes remain either flat or trending lower. The recent bump in Third Quarter (3Q) GDP was largely due to one-time inventory buildup that will undoubtedly weigh heavily on future readings. The same rule applies to unemployment where the uptick in payrolls is overshadowed the bleak participation rate which continues to reflect the abysmal state of the labor market. Also, the New York Fed just released a report (FRBNY Survey of Consumer Expectations: Household Finance Expectations) showing that “both household income growth and spending expectations are basically flat-lined (and) that there is no expectation of things getting any better or any worse.” (Housingwire) Needless to say, when consumers are as pessimistic as they are today, it greatly impacts their spending habits. (which the survey confirms)

Finally, the US economy is bound to be wacked by Japan’s accelerated QE program which has slashed the value of the yen weakening US exports while pushing up the value of the dollar. Like the Fed, the Bank of Japan is following a beggar-thy-neighbor policy which exports deflation to its trading partners in the relentless pursuit of aggregate demand. This is how currency wars start.

All of these are adding tinder to a woodpile that could burst into flames in 2014. CLSA’s prescient analyst, Russell Napier, believes the world is about to experience a “deflationary shock” that will send raw materials, manufactured goods, and stocks plunging. Here’s a short excerpt from his article titled “An Ill Wind” via zero hedge:

“Three times since 1997 inflation has fallen below 1% with very negative impacts for equity investors. On all three occasions an existing low level of inflation was forced lower by dramatic events: the bankruptcy of Russia and collapse of LTCM in 1998; the terrorist attacks of 11 September 2001; and the bankruptcy of Lehman Brothers in September 2008. While nobody would attribute the 11 September atrocity with extant global deflationary forces, the other two episodes can clearly be associated with such forces. So perhaps it is global deflationary forces creating a bankruptcy event, somewhere in the world, that is the catalyst for a sudden change in inflationary expectations in the developed world. It can all happen very quickly; and it is dangerous to stay at an equity party driven by disinflation when it can spill so rapidly into deflation.

In 1998 falling export prices triggered a Russian default, and in 2008 falling US house prices triggered the Lehman bankruptcy. Going back further, deflation in the oil price in 1982 produced a Mexican default and a credit event which threatened to bring down the US banking system. Deflation in these key prices produced a credit event which rapidly produced a major reassessment of the outlook for the general price level. Across the world today we see falling commodity prices and, primarily due to the weak yen, falling manufactured-goods prices. When there is plenty of leverage in the system and any key price starts to decline then a credit event and a sudden change in inflationary expectations are much more possible than the consensus believes.” ( “An Ill Wind”, Russell Napier, CLSA, selected excerpts, zero hedge)

The threat of deflation is quite real, in fact, it’s probably just one bank failure away.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Federal Reserve
Subprime Auto

Rates are low, credit is easy, underwriting is shoddy, and sales are booming.

There’s your thumbnail sketch of today’s “surging” auto market. It’s a carbon copy of the subprime mortgage fiasco that plunged the economy into recession 5 years ago. Now the same nightmare is unfolding in Cartopia, the emerging credit Shangri-la where anyone who can transport himself onto a carlot in an upright position can drive away in a shiny new vehicle no-strings-attached.

But how can this be happening, you ask? Didn’t the US Congress pass strict new regulations, like Dodd-Frank, to prevent the banks and finance companies from lending billions of dollars to borrowers who don’t have the ability to repay the debt?

Not exactly. The fact is, the powerful auto lobby snuck in a neat little provision that exempted them from those nitpicky rules. Here’s a little background from Slate’s Matthew Yglesias:

“Measures like the CARD Act and the Dodd-Frank bill’s creation of a Consumer Financial Protection Bureau both tilt in the direction of less consumer debt. But the wide dispersal of car dealerships across almost every congressional district in America means that the car dealership lobby is actually stronger than the Wall Street lobby, and it was able to get a special carve-out from Dodd-Frank. Unlike any other form of consumer lending, auto loans are outside the purview of the CFPB. And they’re expanding while other consumer loans are shrinking.” (“The Changing Shape of American Debt“, Matthew Yglesias, Slate)

Gosh. You mean Congress buckled to the power of big money? That’s shocking!

And now it looks like we got trouble on our hands because auto sales are soaring but a lot the loans are never going to be repaid. Isn’t that going to wreak havoc on the financial system again?

Sure, but let’s look on the bright side: Auto sales are up big, really big. In fact, according to the Wall Street Journal “U.S. auto sales in November ran at the strongest pace in more than six years… lifting the annualized sales pace to 16.4 million vehicles.” (WSJ)

Chrysler is up, Ford is up, Malibu is up, Cadillac and Buick are up. Heck, even the pint-sized Volt is up. Everything’s up; autos, trucks, SUVs, the whole kit-n-kabootle. Detroit is this year’s Comeback Kid and it’s all due to creative financing. Isn’t that reason-enough for celebration?

Sure, but doesn’t it seem a tad reckless to lend gobs of money to people with crappy credit scores who can’t even come up with a few hundreds bucks for a down-payment? That sounds like a prescription for disaster to me. Just look at this from Reuters:

“Lenders made 26.04 percent of their loans on new cars to buyers with subprime credit scores…. For loans on used cars, the portion to subprime borrowers rose to 54.95 percent…

As the lenders made bigger loans, they also extended credit further beyond the value of the vehicles. The average loan-to-value on new cars rose to 110.6 percent… On used cars it rose to 133.2 percent…

Auto lenders often provide loans that exceed the value of cars they are financing because borrowers want cash to pay sales taxes and fees.

Extra-long loans are becoming more common. Some 19 percent of new car loans were made for more than six years…

… the average loss on loans gone bad jumped to $7,770 in the third quarter from $7,026 a year earlier and repossessions increased sharply, particularly for subprime borrowers.” (“U.S. car buyers borrow more as rates fall and standards loosen“, David Henry, Reuters)

Car dealers are not only skipping the down payment and extending the loan into the next millennia (more than 6 freaking years, for chrissakes), they’re also forking over MORE money than the value of the car. That’s what that “133.2 percent” LTV means. It means Mr Subprime Autobuyer can stick a wad of cash in his coat pocket after the ink dries and trundle off to Olive Garden with the kids for a night on the town in his brand-spanking new Impala.

Who said Amerika isn’t a great place? Here’s more from Bloomberg:

“A woman came into Alan Helfman’s showroom in Houston in October looking to buy a car for her daily commute. Even though her credit score was below 500, in the bottom eighth percentile, she drove away with a new Dodge Dart. A year ago, “I would’ve told her don’t even bother coming in,” says Helfman, who owns River Oaks Chrysler Jeep Dodge Ram, where sales rose about 20 percent this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs, and bring me some down payment.”

… U.S. auto sales, on pace for the best year since 2007, are increasingly being fueled by borrowers with spotty credit. They accounted for more than 27 percent of loans for new vehicles in the first half of the year…

“Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, an analyst with Morgan Stanley (MS), wrote in an October note to investors.” (“Subprime Loans Are Boosting Car Sales“, Bloomberg)

Sure, it has, Adam, because easy credit means better sales and bigger profits. We all know that. Just like we know that it’s possible to lend money to people who have “spotty credit” if they show that they’re employed and paying their bills on time, like the woman above. But that’s not what this is all about, is it? This is about stretching the envelope in order to juice short-term profits. It’s also about “securitization”, that is, packaging up the garbage loans into bonds and selling them to suckers looking for a higher yielding investment. That’s what this is really about; scamming people. Take a look at this from Bloomberg:

“The money for subprime loans comes from yield-starved investors who buy bonds backed by them. Issuance of such bonds, which pay higher rates than U.S. government debt, soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, but still below the peak of about $20 billion in 2005, according to Harris Trifon, an analyst at Deutsche Bank ….

Shoddy home loans packaged into bonds by Wall Street banks fueled the financial crisis. Subprime auto loans are a good investment, Helfman says: “A person that has to get from point A to point B, they’re not going to jeopardize their job. They have to pay the car payment before they pay anything else.” (Bloomberg)

How’s that for symmetry: In one breath Bloomberg admits that “Shoddy home loans … fueled the financial crisis”, then they follow up with old Helfman saying there’s nothing to worry about, everything’s under control. We gotcha covered!

What a joke. More than one-quarter of auto loans are going to people with credit scores under 500, which “is the highest share since tracking began in 2007.” That’s a big red flag right there. Then, a sizable portion of those loans are being gift-wrapped into securities and sold to Aunt Mable’s retirement fund, which will undoubtedly get walloped sometime in the not-so-distant future. That’s red flag Number 2. Finally, there’s the dealer mark ups which, according to one analyst add “several percentage points above what they obtain from their financing company, which generates an estimated $25.8 billion in payments from consumers over the lives of their loans.” Red flag number 3.

I suppose we should all be shocked that the finance geniuses are back at it again, back fleecing the sheeple with the same swindle they worked before. But the sad fact is, no one is surprised at all. In fact, the public seems oddly resigned to the idea of being ripped off again.

It’s just business as usual.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Financial Debt

Wall Street is buzzing, and it’s all about bubbles.

In fact, according to Google Trends, interest in the term “stock bubble” was higher in November 2013 than anytime since October 2008.

And that should be expected given that the Dow Jones just broke through the 16,000-mark while the NASDAQ sailed-past the 4,000 milestone for the first time in 13 years. And did I mention that S and P 500 just closed above 1,800 for an all-time high?

While surging stocks are not proof of a bubble, they do draw attention to the condition of the underlying economy which is still in deep distress 5 years after the recession ended. With unemployment at 7.2 percent, GDP barley growing, droopy personal consumption, flagging durable goods, shrinking revenues, flatlining wages, falling incomes, widening inequality, plunging consumer sentiment, 47 million Americans on food stamps, and myriad other signs of persistent economic stagnation; the so called “recovery” is anything but robust. So where are stocks getting the oomph to keep rising?

That’s not a question that bothers the bubble deniers who have started popping up on the business channels like they did prior to the housing and the busts. These so called “experts” assure the public that all the bubble talk is just scaremongering by disgruntled Cassandras who don’t understand that current valuations are reasonable. They say that soaring prices reflect “strong fundamentals.

Uh huh.

Last week, serial bubblemaker, Alan Greenspan, made an appearance on Bloomberg TV where he scoffed at the idea a stock bubble saying, “It’s a little on the upside, (But) “This does not have the characteristics, as far as I’m concerned, of a stock market bubble.”

There you have it from Maestro himself. No bubble here. Move along now.

Others, however, are not as confident as Greenspan. They think stock prices have less to do with fundamentals than they do with the Fed’s uber-accommodative policy which has kept short-term rates set below the rate of inflation for 5 years straight, providing a subsidy for risk taking. They also point to Fed chairman Ben Bernanke’s $85 billion per month asset purchase program, called QE, which has expanded the Fed’s balance sheet by $3 trillion lifting stock and bond prices across the board. Stock prices are based on Central Bank intervention. Fundamentals have nothing to do with it, nothing at all.

As for the bubble; judge for yourself:

Margin debt on the New York Stock Exchange is currently at its highest level ever. It’s even higher than before the crash in 2007. When investors borrow a lot of dough to buy stocks, you’re in a bubble, right? Because that’s what a bubble is, tons of credit pushing up prices. And when something bad happens, like the Lehman Brothers default, then all the over-extended borrowers have to dump their stocks pronto, which causes firesales, panics and financial meltdowns. Been there, done that.

So why is there so much margin debt now, you ask?

Because of zero rates. Because of QE. Because speculators think the Fed will keep prices high by pumping more liquidity into the system. It’s called the Bernanke Put, the belief that the Fed will prevent stocks from falling too fast, too far. Margin debt is a reasonable reaction to the Fed’s policy, which is why the Fed is ultimately responsible for the risky behavior.

Now check this out from the New York Times:

“Since the dark days of 2008, the Nasdaq has risen more than 150 percent, twice as much as the old-school Dow industrials. Money has been pouring into social media stocks. As of Friday, Twitter had risen nearly 60 percent since it went public only a few weeks earlier.

Once again, new “metrics” are being applied to justify stratospheric valuations. Twitter is losing money. A price-to-earnings ratio? There is no E in the P/E. But its stock is trading at 20-odd times the company’s annual sales. Good enough….

Eight months ago, Snapchat was valued at $70 million. Today, it is valued at $4 billion, even though it has zero revenue. Six months ago, Pinterest was valued at $2.5 billion. Today, it is valued at $3.8 billion — and no revenue there, either. And last week news broke that Dropbox was said to be seeking a new round of funding that would value the company at $8 billion, up from $4 billion a year ago.” (“Disruptions: If It Looks Like a Bubble and Floats Like a Bubble”, New York Times)

Did you catch that? A company with zero revenue is worth $3 billion more today than it was 8 months ago. So we’re back to the bad old days of the bust. This is the result of low rates and QE. It has nothing to do with fundamentals. We’re not talking earnings here. We’re talking manipulation, intervention, and central planning.

Then there’s this from the Wall Street Journal:

“Investment funds aimed at individual investors are barreling into collateralized loan obligations, a complex and volatile type of security that was shaken by the financial crisis.

Lured by annual returns of as high as 20%, some mutual-fund managers are buying CLOs through investment funds that purchase stakes in loans to companies with low credit ratings…. …

The biggest buyers of these securities usually are hedge funds, insurers and banks. But mutual funds and business-development companies, which pitch themselves to individual, or retail, investors, have collected more than $60 billion in money from clients this year, according to Keefe, Bruyette & Woods, Inc. and fund-data provider Lipper.

CLO returns are higher than on corporate bonds and other loans, but CLO prices could plunge if the risk rises that companies will run into trouble repaying their loans. That happened in 2011, and some fund managers say retail investors are mostly unaware that the firms they invest in are buying CLOs…” (“Volatile Loan Securities Are Luring Fund Managers Again”, Wall Street Journal)

So the big boys are climbing further out the risk curve to scratch out a higher rate of return on their investments; investments which–by the way– will eventually cost ”retail investors” (you and me) a bundle. And the reason these financial institutions are engaging in such risky behavior is because rates have been stuck at zero for 5 years, forcing them to look for higher yield wherever they can find it. It’s all part of the Fed’s Pavlovian conditioning. First you turn the interest rate dial to zero, then you juice stocks prices with QE. And then you wait for the suckers (Mom and Pop) to reenter the market so you can cut them down like corn stalks in a combine. Works every time, just take a look:

“One development that has experts concerned is the return of individual investors, who are known for getting into the stock market near peaks….One way to measure their activity is to look at net inflows into stock mutual funds (excluding exchange-traded funds). When investors put more into stock funds than they take out, it’s called a net inflow. When they withdraw more than they invest, it’s a net outflow.

This year, net inflows totaled $176 billion through Nov. 20, according to Lipper….Most of that money is coming from bank accounts and money market funds…”


So the sheeple are about to get sheared again, right? Just like Bernanke and his Wall Street buddies planned from the get go. But, guess what? Just as Mom and Pop are getting back into stocks again, the big boys are getting out. Take a look at this report from BofAML from the Macronomics blogsite:

”BofAML clients were net sellers of US stocks for the fifth consecutive week, in the amount of $2.3bn. Net sales were led by institutional clients, who returned to net selling following a week of muted buying.

How do you like that? So once the chickens get lured back into the henhouse, the door slams shut and the fox fires up the stove for another big feed. Isn’t this how it always works out?

Now check this out in Forbes about ”cov lite” loans:

“Covenant-lite loan activity in 2013 is smashing all records, and appears to be picking up speed. Through Aug. 8 there has been $162 billion of covenant-lite loan issuance in the U.S., more than five times the amount seen at this point in 2012, and easily topping the $86 billion of cov-lite deals logged all of last year.” (“Cov lites” soar to new record”, Forbes)

Unfortunately, cov lites are a particularly lethal form of lending which strips “typical lender protections” from credit agreements. Here’s the scoop from the New York Times:

“Leveraged loans became popular before the 2008 collapse but nearly disappeared afterward, regarded as a symbol of unbridled lending. But they started to return in 2010 and are now back in force, with volumes of $548.4 billion this year through Nov. 14, already exceeding the precrisis level of $535.2 billion in 2007.

The type of leveraged loans that Learfield took out are known as covenant-lite, financial lingo for loans that lack the tripwires that could alert investors to any potential financial troubles at the company that could affect repayment. More than half of all leveraged loans issued this year have been the so-called cov-lite types, double the level seen in 2007 on the eve of the credit crash.” (“New Boom in Subprime Loans, for Smaller Businesses”, New York Times)

So, let’s recap: The Fed has managed to spark another surge in risky lending (that “exceeds precrisis levels”) that threatens to blow up in investors faces leaving them in less prepared for retirement than they are today.


And there’s more. Take a look at the recent stock buyback frenzy, which is where companies buy their own stock to goose the price instead of investing in plants, equipment, hiring, or any other type of useful, productive activity. This is from Bloomberg:

“Multiple expansion through share buybacks have been driving indeed the stock market higher greater than earnings have. …. Buybacks rose by 18% Quarter-over-quarter to $118 billion in 2013, up 11% year-over-year to $218 billion.” (Bloomberg)

Even so, Greenspan sees no bubble. Stock prices are based on good old fundamentals, like earnings. What could be more fundamental than earnings, right?

Take a look at this from the Testosterone Pit:

“Corporate earnings will grow this year at their lowest level since 2009. Revenue growth at public companies is almost non-existent. Companies are buying back stock at a record pace to boost per-share earnings.” (“What Really Bothers Me About this Stock Market”, Michael Lombardi, Testosterone Pit)

Huh? So earnings aren’t so hot either?

Apparently not. And that means the fundamentals are actually weak, which makes sense since the economy is in the crapper.

Then we ARE in a bubble, after all?

Yep. And when it bursts it’s going to cost a lot of people a lot of money. Just like last time.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
Shifty Shinzo's Corporate Welfare Program

Abenomics is based on the idea that if you give rich people a lot of money, they’ll spend it and the economy will get better. There are a few minor flaws to the theory, however, like the fact that it doesn’t work. While trickle down has greatly impacted the sales of Gucci handbags, Farragamo scarves, Ferrari sports cars and other luxury items; it’s done zilch for the broader economy where workers have seen their wages drop for 16 months straight and where the prices on food and fuel have steadily climbed higher.

Even so, Japan’s financial media can barley contain their enthusiasm for Japan’s Prime Minister Shinzo Abe’s “radical reflationary policy”. And it’s easy to see why. Stock prices are up sharply, corporate profits are soaring, and Japan’s Robber Barons are making money hand-over-fist. What’s not to like? Just look at this from Bloomberg:

“Japan’s three biggest banks reported a surge in first-half profits this week that they said means the year will turn out better than expected…

Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Mizuho Financial Group Inc. (8411) increased their combined net income target by 23 percent to 2.26 trillion yen ($23 billion) for the year ending March, company statements showed. …

The higher profit targets at the three Tokyo-based banks exceeded the estimates of analysts surveyed by Bloomberg as the equity-market revival spurred sales of investment products and boosted the value of the lenders’ stakes in other companies. Fees and commissions climbed at least 20 percent in the first half from a year earlier, the reports showed.” (“Japan’s Biggest Banks See Profit Declining in Second Half“, Bloomberg)

So the banks are making out like bandits while wages keep falling and the economy remains mired in a long-term Depression? What a surprise. Here’s more from Bloomberg:

“Toyota’s …. analysts estimate it will post record profit this fiscal year — illustrates how Prime Minister Shinzo Abe’s policies that have weakened the yen are benefiting Japan’s exporters and helping revive an economy that’s been through three recessions in five years. Large manufacturers are more confident than they’ve been since 2007, and share prices are near the highest in half a decade.

“In the past few months, Abenomics has pushed up sales of Japanese carmakers by weakening the yen,” said Yuuki Sakurai, President of Fukoku Capital Management Inc….

Toyota shares have gained 58 percent this year, compared with GM’s 23 percent. Volkswagen’s stock has been little changed.” (“Toyota Outsells GM in Quarter as Abe Gives Edge to Japan“, Bloomberg)

Yipee! Another windfall for big business while the workerbees get a pat on the head. This explains why the financial media wet themselves everytime they talk about Shifty Shinzo’s monetary elixir. (aka–Abenomics) What’s good for Toyota, is good for the country, right?

Now get a load of this from Testosterone Pit:

“The 1,280 largest publically traded Japanese companies, excluding financial firms, reported outright glorious earnings. Their combined net income doubled to ¥5.5 trillion ($55 billion), from ¥2.25 trillion last year, according to a Bloomberg report. Translating earnings from operations overseas into weaker yen beautified the results of many companies.” (“Here Is Proof (Provided By Japan Inc.) Why Abenomics Fails The Real Economy“, Testosterone Pit)

“Glorious earnings”?

You betcha. The Bank of Japan’s colossal money printing operation has sent the yen reeling which has boosted profits on Japanese exports. The only drawback is that rising import prices have put more pressure on household incomes. Gasoline is currently over $6 per gallon which is forcing ordinary working people to cut back on the basic necessities. Droopy personal consumption is why 3rd Quarter GDP clocked in at a measly 0.5% (1.9% annualized), which is a sharp drop from the previous quarter of 3.8%. And–here’s the corker–the lion’s share of 3Q GDP was inventory buildup and government spending, which means that the Japanese consumer is even more on the ropes than we thought.

But, hey, at least profits are up, right? And that’s what counts. Here ‘s more from Testosterone Pit:

“Deeply troubled Panasonic has cut 71,000 jobs since 2011. It’s cutting, dumping, and shedding…

Sharp has been implementing a multi-year restructuring plan of drastic cost cuts, selling assets, and shuttering facilities…

Toyota, announced in May that it would limit its capital expenditures for fiscal 2014 to ¥910 billion, …

Mazda….started chopping workers, offshoring production to Mexico…

Cutting costs at home, offshoring production, restructuring operations, shuttering plants, reducing the workforce, halting plant construction…. These companies are cutting back in Japan, instead of investing in Japan.” (Testosterone Pit)

Can you see the pattern here? The companies that are raking in the biggest profits are dumping workers, cutting costs, and shifting their industries to cheaper locations. Is that why Paul Krugman is so jazzed about Abenomics, because he wants to speed up the process that’s reducing workers in developed countries to Third World poverty?

Here’s how the Princeton Professor summed it up in a recent NYT article:

“…the overall verdict on Japan’s effort to turn its economy around is so far, so good. And let’s hope that this verdict both stands and strengthens over time. For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.

As I said at the beginning, at this point the Western world has seemingly succumbed to a severe case of economic defeatism; we’re not even trying to solve our problems. That needs to change — and maybe, just maybe, Japan can be the instrument of that change.” (“Japan the Model“, Paul Krugman, New York Times)

What the heck is Krugman talking about?

Japan is “the Model” all right; the model of structural adjustment, the model of shock therapy, and the model of wacky monetarist theories which further exacerbate the gaping chasm between rich and poor.

But maybe we’re being too hard on old Krugie, after all, who could have known that doubling the money supply and buying 70 percent of all newly-issued Japanese Government Bonds (JGBs) wouldn’t ignite a flurry of activity that would boost investment, increase hiring, and send GDP to the moon?

But that hasn’t been the case, has it? Take a look at this from Bloomberg:

“Corporate investment declined from 4.4% last quarter to just .7% this time around. Consumer spending contributed 0.1% and business investment 0.2% to third quarter GDP….In addition, industrial production figures for September were revised lower from 1.5% to 1.3%.” (Bloomberg)

Just look at the data. Abenomics is a fraud. Japan’s economy is in a state of near-terminal sluggishness bordering on complete inertia. In fact, the only reason GDP rose to nearly 4 percent in Q2 was because Abe frontloaded his program with a sizable chunk of fiscal stimulus ($100 bil) which generated some much-needed activity via government spending. Unfortunately, the fiscal component was a one-shot deal that will run out sometime in 2014 clearing the way for another bout of severe stagnation.

Adding to the problem, Abe has just passed a regressive consumption tax that will go into effect on April 1, 2014, and which will likely push the economy back into recession. So, expect a brief uptick in spending for a month or two as consumers try to make their big-item purchases before the deadline, followed by a sharp drop-off immediately afterwards. (We saw the same thing take place in the US during the “cash-for-clunkers” fiasco and the “Firsttime Homebuyers” tax credit, both of which pulled demand forward, leaving a big hole in subsequent sales.)

Another headwind facing Abenomics is that –as the Japan Times notes–“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working.”

More from the Japan Times:

“Since April, the BOJ has been gobbling up JGBs from banks and the open market. Its purchases amount to roughly 70 percent of the value of all new JGBs issued. But the banks are just stowing that money in their accounts at the BOJ because they can’t find any companies interested in borrowing it.

“There is no demand for funds on the part of businesses. That’s why the monetary easing is not working,” Noguchi said…

This means banks are just depositing the massive funds provided by the BOJ in their own accounts at the central bank. The unloaned cash is thus having little affect on the real economy…” (“BOJ’s money mountain growing but debt may explode“, Japan Times)

Businesses aren’t borrowing, because there’s nothing to invest in. And there’s nothing to invest in because there’s no demand. And there’s no demand because people’s wages are dropping, they have to set aside more money for their daily expenses and retirement, and because the outlook for the future has never been more bleak. So they’re not borrowing, the economy is not growing and the prospects for a strong recovery–or even an end to deflation–are minimal to none.

And on top of it all, Japan’s fiscal situation continues to deteriorate. The debts are piling up, “the trade balance has turned into a deficit and the current account surplus has shrunk.”

No matter. Shifty Shinzo would rather shower his crony carpetbagging friends with filthy profits than worry about anything so incidental as the economy, the people or the nation.

What difference do they make?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Japan

Remember how Quantitative Easing was going to “get the banks lending again”?

Well, it hasn’t worked that way. In fact, after 4 years of zero rates and $3 trillion in monetary pump-priming, “banks are lending less to small businesses and consumers than before the financial crisis”. (International Business Times)

But how can that be, you ask, after all, didn’t the banks just report record profits in the Third Quarter?

Yep, they sure did. $40 billion-worth. But the bulk of that dough was raked off their gaming operations, you know, all the dodgy activities that Dodd-Frank regulations were going to stop, but never did. As far as lending to households and small businesses, that’s been a non-starter from the get-go. Check this out from the IBT:

“Small business loans… decreased in 2012 from 2011. … there was $588 billion in small business loans outstanding in June 2012, 3.1 percent less than at the end of 2011.” (Banks Have Received $2.3 Trillion In Quantitative Easing But Are Lending Less To Small Businesses And Consumers Than Before The Financial Crisis, International Business Times )

Okay, so let’s do the math: The Fed beefs up its balance sheet by a hefty $3 trillion, and the banks issue a whopping $588 billion in new loans.

Sounds like a bargain to me! You’re doing a heckuva job, Bernanke!

And household credit is in the dumps too, in fact, loans to households haven’t budged in the last two years. And the reason they haven’t budged is because demand is weak, which is what happens when the economy is mired in a Depression. Most people are either still paying off debts left over from the big housing bust or trying to squirrel-away a few shekels for retirement. Or, maybe, they’ve sworn off credit altogether which is a phenom that took place following the Great Depression some 80 years ago. In any event, the low rates haven’t seduced people into spending money they don’t have on junk they don’t need. And that rule applies to credit cards as well as banks loans, as Jim Quinn points out in a recent post on his website, The Burning Platform. Take a look:

“Wall Street introduced the credit card in 1968…

There were 200 million Americans in 1968 and $2 billion of credit card debt outstanding, or $10 per person…

By July of 2008 credit card debt outstanding peaked at $1.022 trillion and the population was 304 million, with credit card debt per person topping out at $3,361 per person. Over the course of 40 years, the population of this country grew by 52%. Credit card debt grew by 51,000%. Credit card debt per person grew by 33,600%. ….

Since July 2008 credit card debt has declined by $175 billion… and has only grown by a miniscule $13 billion in the last 29 months. (The Subprime Final Solution, The Burning Platform)

So people aren’t maxing out their credit cards anymore either, which makes perfect sense in a world where incomes are trending lower, where paychecks remain frozen in time, and where personal spending is impacted by the grim expectation that one’s financial situation will probably be worse tomorrow than it is today. The fact is, no wants to load up on debt in Obama’s Debtcropper U.S.A because they have no idea what’s in store for them in the future; whether they’re about to get a cut in pay, shorter hours, or their pink slip. They just don’t know, and that nagging uncertainty is shaping their borrowing habits.

But that creates a problem, doesn’t it? Because — as you know — most of the growth we’ve experienced in the last few decades has come from the surge in household debt. (Wages have barely grown at all.) So if people slow their borrowing and stop running up their credit cards, then where’s the growth going to come from? Housing?

Not likely. Despite the Fed’s impressive effort to reflate the bubble that burst in 2006; higher rates and rising prices have put the kibosh on sales which have dropped for 2 months straight. That’s going to send more speculators (who represent 50% of the market) racing for the exits, putting downward pressure on prices. Housing should remain relatively flat for the foreseeable future regardless of what the Fed does. The mini boom of 2013 is pretty much kaput.

What about student loans? Are lenders issuing enough loans to students to buoy GDP, lower unemployment, and fire-up the economy?

Nah. Student loans have kept credit allocation in the black, but their impact on the economy is negligible at best. It’s just another dead end.

Auto loans?

While auto sales have been red hot for more than a year, you have to wonder how much gas is left in the tank. Keep in mind, sales would be flagging already if it wasn’t for the fact that lenders have returned to shoddy underwriting, subprime loans and, extended contracts which stretch halfway to the moon and back. Check it out:

“Detroit Free Press: – A boom in auto loans continues to support a resurgence in U.S. car buying that has hit its highest sales pace since 2007. The total amount of outstanding auto loans topped $782.9 billion as of Sept. 30, up $103 billion from the same period last year, according to Experian Automotive’s quarterly report…

Detroit Free Press: – Banks have become increasingly willing to provide loans to sub-prime customers and are allowing consumers to finance over a longer period, with some loans extending as long as eight years…

The longest-term new-car loans — 73 to 84 months — have jumped 25.1 percent in the past year and now make up 19.5 percent of total new-car lending, according to Experian Automotive. All other loan-length categories, in fact, have become less popular as buyers shift to longer terms to get lower payments.”
(“Banks piling into auto loans as demand picks up”, Sober Look)

84 months to pay off a auto loan? Yowza!

So auto sales have less to do with real organic demand than they do with shell-game, seat-of-your-pants, Ponzi financing the likes of which blew up the system just 5 years ago. The big lenders are back for a second bite of the apple already. It’s shocking.

Anyway, from the looks of things, it’s going to be hard to inflate much of a credit bubble in any of the usual sectors: Housing, autos, credit cards or student loans. In fact, I would expect to see less money poring into these areas rather than more.

But if credit doesn’t expand, then the only way the economy is going to grow is if wages go up, the government increases its deficits, or businesses boost capital investment. So, what’s it going to be?

Well, we know wages aren’t going up, so we can scratch that baby off the scorecard right away. We also know that budget-slasher, Obama, is not going to do an about-face and launch another round of fiscal stimulus anytime soon. He’s going to keep hacking away government spending and safetynet programs until his sorry term is up and they ship him back to Chicago to work on his memoirs.

That leaves business investment, right?

Oddly enough, there is some good news on that front, although the details may come as something of a surprise. You see, corporations have been borrowing more but NOT to invest in their businesses. Oh, no. In fact, according to Westpac’s Elliot Clarke:

“…business investment has decelerated from over 9% in June 2012 to little more than 2% in June 2013 ….. From the Fed’s flow of funds data, it is evident that nonfinancial firms have been adjusting their financial structure, funding stock buy backs and acquisitions with borrowed funds. This is not only a recent phenomenon; it has been seen throughout the recovery…

How weird is that? So, the Fed’s goofy monetary policies have turned the corporations into hedge funds. They’re no longer building factories, piling up inventory, or buying tools and equipment. They’re simply taking advantage of the surge of liquidity the Fed is pumping into the financial markets to buy back their own stocks and juice the price. Or course, none of this leads to more demand for funds, a stronger credit expansion, more hiring, or a sustainable recovery. All it does is goose equities prices paving the way to bigger end-of-year bonuses, which seems to be the objective.

Anyway, there’s your credit expansion in a nutshell; “stock buy backs and acquisitions with borrowed funds”. In other words, more leverage plowed into already-overvalued stocks. Didn’t we try this before?

Now check this out from the Wall Street Journal:

“Small banks saw annualized loan growth of more than 6% in the second quarter, compared with less than 2% at the 25 largest banks, according to research by Keefe, Bruyette & Woods Inc….The loan-growth figures reflect everything from mortgages to auto loans, credit cards and business loans.

At the end of the second quarter, loans at small banks had grown 4.7% annually compared with growth of less than 1% for big banks, according to Federal Reserve data…..The nations four largest banks … saw average loan growth of 1.6% in the second quarter from a year earlier, according to Charlottesville, Va., data provider SNL Financial.” (“Smaller Banks’ Loans Growing Faster Than Larger Rivals”, Wall Street Journal)

This is really mindboggling. I mean, think about it; all the benefits of QE have gone to the big banks, right? But these behemoth zombies are not even lending as much as the small banks, in fact, the loan growth of the nation’s four biggest banks has shrunk to “less than 1%”. Amazing.

And QE was going to get these guys “lending again”?!?


QE was never going to boost lending. It was doomed from Day 1.

How do we know?

Because we’ve been through this drill before during the last Great Depression. Here’s a little background from economist James K. Galbraith who predicted our current credit troubles back in 2009 in an article titled “No Return to Normal”:

“Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936… The New Deal rebuilt America physically, providing a foundation … from which the mobilization of World War II could be launched…..

“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended….. the relaunching of private finance took twenty years, and the war besides.

“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.”(“No Return to Normal: Why the economic crisis, and its solution, are bigger than you think” James K. Galbraith, Washington Monthly)

Did you catch that part about “the full restoration of private credit will take a long time”? That means don’t hold your breath for the next big credit expansion, because it ain’t going to happen anytime soon.

And, here’s something else to chew on: “Great Depression expert” Bernanke KNOWS that lending is going to stay soft for quite a while, in fact, he’s counting on it. Because if lending suddenly picked up, activity would increase, unemployment would drop, the economy would grow, and inflation would head higher. Which is precisely what Bernanke DOES NOT WANT. Because if inflation rises, then the Fed will have to slam on the brakes, raise rates and stop pumping trillions into the financial markets. That would make it more expensive for the banks to roll over their massive debts (aka–toxic assets and backlog homes) And, it would also send stocks off a cliff, which is a headache that Bernanke can live without.

So, what does Bernanke really want?

More of the same. You see, he needs the cover of a sluggish, underperforming economy, with high unemployment and low inflation, to keep doing what he’s doing now, which is filling the coffers of the big banks and brokerages with freshly-minted Bennie bucks.

Did I mention that profits on Wall Street have never been better and that the Dow Jones and S&P 500 soared to record-highs again last week?

It’s Christmas time on Wall Street thanks to Santa Claus Bernanke.


MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Counterpunch Archives, Federal Reserve
Stagnation Hysterics

America’s “highest profile economist” thinks we need more asset bubbles to battle negative real interest rates and persistent secular stagnation.

In a controversial post on his blogsite, New York Times columnist Paul Krugman argues that bubbles may be necessary to make up for insufficient demand, high unemployment, and sluggish growth. Here’s the clip from his blog “The Conscience of a Liberal”:

“We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest…” (“Secular Stagnation, Coalmines, Bubbles, and Larry Summers”, Paul Krugman, New York Times)

So, absent bubbles, there’s no credit expansion, no full employment, no strong recovery? That sounds a lot like an excuse for keeping the current policy (QE and zero rates) in place, doesn’t it?

But what an audacious claim, and what a sad reflection on the economics profession when its most celebrated spokesmen throws up his hands in despair and says, ‘That’s the way it is, folks. Deal with it’, instead of offering constructive alternatives. Isn’t that what economists are supposed to do, figure out how to get us off life-support and back to full employment and growth? Here’s another clip from his post:

“…we are an economy in which monetary policy is de facto constrained by the zero lower bound …, and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative… this situation the normal rules of economic policy don’t apply. As I like to put it, virtue becomes vice and prudence becomes folly.” (NYT)

Okay. So if the Fed’s main policy tool, the Feds Funds Rate, isn’t doing the trick and stimulating demand, what do you do? Keep rates locked at zero for 5 or 10 years while the Fed pumps trillions into bank reserves sending stocks into the stratosphere and inflating bubbles in all types of financial assets?

Krugman seems to think so. And so does his buddy, Larry Summers, whose presentation at a recent IMF conference was the catalyst for Krugman’s musings.

So let’s ask the obvious question first: Would Summers be equally enthusiastic about asset bubbles if his rich banker friends had felt the full impact of the last bubble, that is, if the 9 biggest banks in the country had been nationalized, shareholders wiped out, bondholders given haircuts, management replaced, and toxic assets sold off in public auctions to the highest bidder? Or has Summers opinion been shaped by the fact that the banks were bailed out and only the “little people” suffered in terms of lost home equity ($8 trillion), lost jobs (14 million), record foreclosures (6 million), and a decimated US economy?

My guess is that Summers feelings about asset bubbles have nothing to do with economics and everything to do with outcomes. It’s all a matter of whose ox is gored. And we all know whose ox took the biggest goring in the financial crisis; ordinary working people.

And, why does Krugman pretend like it just dawned on him that asset bubbles might be a good thing? Here’s a quote from his post:

“I’m pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here’s the thing: I’ve been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers! (Paul Krugman, The Conscience of a Liberal”, NYT)

Krugman makes it sound like the whole asset bubble thing just occurred to him which is a load of malarkey. Krugman’s been a bubble-pusher from the beginning. Here’s an excerpt from an article he wrote in 2002 saying that Greenspan should inflate a housing bubble to offset the fallout from the bust:

“…. the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” (Dubya’s Double Dip?”, Paul Krugman, New York Times)

Well, that’s pretty clear, isn’t it? So if Krugman was a proponent of bubblemaking way back in 2002, why does he act like it never dawned on him until he heard Summer’s speech?

Could it be because Krugman is a trusted establishment liberal whose job is to shape public opinion? Is that it? In this case, Krugman is trying to dignify the means by which more wealth is transferred to the Wall Street kleptocrats via asset bubbles. He’s also laying the groundwork for keeping the same thieving policies in place for as long as possible, which makes him an ardent defender of the status quo.

Keep in mind, this is the same guy who, for the last 5 years, has been telling us that the only thing we needed to “End this Depression Now” (Krugman’s book) is to widen the budget deficits, increase government spending, and launch another round of fiscal stimulus. Now he’s done a complete 180 and is pushing a policy that–according to Naked Capitalism’s Yves Smith–”depicts asset bubbles as necessary and desirable” That’s quite a reversal, don’t you think?

Krugman again: “If you take a secular stagnation view seriously, it has some radical implications …. that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy….”(NYT)

That’s the GOP’s view of things anyway, isn’t it? “What do we need regulations for,” they say. ”They just put a damper on growth.” Krugman’s approach is a bit subtler, but it amounts to the same thing. By suggesting that beating stagnation is the highest priority, he implicitly legitimizes everything from mega-leverage at the banks to liar’s loans. This is about as close as you’ll get to economic malpractice without the Nobel Committee storming to your front door and demanding their statue back.

Krugman again: “Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.” (NYT)

“Negative real interest rates!” “Persistent secular stagnation!” “Liquidity trap, liquidity trap, liquidity trap”!

Are you scared yet? You should be, after all, that’s what all this alarmist BS is all about. It’s just more fearmongering. In effect, what Krugman is saying is, ‘This is really awful, guys. The world is going to end if we don’t deal with negative rates fast!…Don’t say I didn’t warn you.’

But, wait a minute; wasn’t QE supposed to fix the problem? Isn’t that why the Fed is loading up on $85 billion in USTs and MBSs per month, because rates are stuck at zero and asset purchases are supposed to push the policy rate into negative territory easing the burden of debt and lowering the price of credit?

Sure, it is, but Krugman’s hysterics just underscores the fact that the program is a big, fat fraud that’s done nothing except boost reckless speculation while allowing the crooked banks to roll over their massive debtpile at zero-cost to themselves. (A quick look at the Fed’s latest credit report shows that credit is only expanding in student loans and ripoff “subprime” auto loans which extend the length of the loan to a whopping 84 months! Another QE success story!)

As far as stagnation, well, it’s been around for a long time now, Paul, and precious few economists see asset bubbles as a way out. And while some attribute the problem to demographics,(like Krugman) others think it’s more closely connected to wage suppression, crappy wealth distribution, taxes, the rise of financialization, or capitalism itself. According to authors John Bellamy Foster and Fred Magdoff, the rise of financialization in the US was actually a response to stagnation which was causing a steady decline in the rate of accumulation. Check out this blurb in Monthly Review where the authors explain the origins of the phenom and how it paved the way for the oversized financial system we have today:

”It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite… the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s.

But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality….a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present.” (“Financial Implosion and Stagnation”, John Bellamy Foster and Fred Magdoff, Monthly Review)

Krugman knows all of this. He’s done the research. Like we said earlier, he’s just trying to trying to dignify the means by which the plutocrats are ripping us off while preparing us for more of the same for the foreseeable future. That makes him an asset bubble defender in my book.

Krugman’s “negative rates-secular stagnation” theory is pure bunkum. The problem is not a liquidity trap at all, but what economist Heiner Flassbeck calls an “income trap”, where falling incomes and flat wages have led to droopy demand and weak investment. Here’s an excerpt from a recent article by Flassbeck:

”….the US today …. is restricted by demand and demand is restricted by income expectations of private households at very high levels of unemployment….. It is a story of a dysfunctional labour market…….High unemployment depresses wages, depressed wages depress private consumption and depressed consumption does not allow the economy to recover despite enormous profits in the company sector and desperate attempts of monetary policy…..

…..even well-intended policies may lead to questionable results if the underlying analysis is flawed. Abenomics and most of its academic followers like Paul Krugman regard a protracted liquidity trap as the main reason for the Japanese weakness ….The diminished expectations and the uncertainty of Japanese private households concerning their future income and deflation as such prevent private consumption from taking a lead role in a recovery. To call that constellation a liquidity trap is misleading. In fact, the trap is a wage or income trap much more than a liquidity trap.” (“Japan: Why Paul Krugman doesn’t get it right and Martin Wolf has to move on“, Heiner Flassbeck, Flassbeck-Economics)

Bingo. We have a winner!

The problem is not negative rates, secular stagnation, or liquidity traps. It’s demand, it’s wages, and it’s distribution. If you pay people a decent wage, they have more money to spend, activity increases, unemployment drops, sales pick up, businesses recycle their profits into investment, earnings improve, the demand for funds (loans) pushes rates higher, the economy grows and the world is a happy place. But if you keep crushing labor with numbskull austerity, offshoring jobs, perennial high unemployment, regressive free trade agreements, cutbacks to vital safetynet programs, and bogus monetary policies that only serve the rich; then demand weakens, people’s expectations for the future dims, and the economy grinds to a halt…which it has.

The good news is, fixing for the economy is within our grasp. US workers just need a raise in pay and a bigger share of productivity gains. Putting money in the hands of the people who will spend it, is the fastest way to strengthen the recovery.

The bad news is, the big money guys who call the shots, like the way things are now. Which means that this stinking near-Depression will probably drag on for a long time to come.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

(Reprinted from Counterpunch by permission of author or representative)