Source : The Economist

The economy of the United States shows apparent signs of recovery. During the second quarter of 2015 the GDP registered an increase of 3.7% –in annual terms– well above the first estimation of 2.3% that was published two months ago.

This new revision of the growth of the GDP filled the Washington leaders with optimism, since according to them, this would dissolve the lack of confidence that arose during the last quarter of 2014, when economic activity fell by 0.7 percentage points [1].

Washington is very content to see the labour market restore itself at a rapid pace. The private sector generated more than 13 million jobs over five and one-half years [2]. In August, the non-agricultural sector reached 173,000 jobs, which even though it represents a lesser amount compared with the average of 247,000 over the last twelve months; it still was enough to diminish the unemployment rate from 5.3 to 5.1%, the lowest since April of 2008 [3].

The United States is practically at “full employment”, according to Loreta J. Mestter, President of the Federal Reserve Bank of Cleveland. Nevertheless, this presumption contrasts the precarity of the majority. The “American way of life” is a fiction that only appears in the cinema and television. The US citizens who live in the poorest suburbs have become the principal victims of an economic policy that favors less than 1% of the population.

The Federal Reserve of the United States has a double mandate, on the one hand, to promote the creation of jobs, and on the other, to guarantee the stability of prices, according to the statutes of the central bank. Nevertheless, these objectives are not filled, they are “a dead letter”.

In the first place, the level business rentability is not high enough to produce an expansive cycle in the long term. In consequence, inflation is too low, even risking a turn to deflation (fall of prices). In the second place, the “dynamism” of the labour market is much overstated by the White House. The rate of unemployment close to 5% hides an underemployment that is still very high [4].

In accord with a much wider definition of unemployment (methodology U-6), that includes part time workers (6.5 millions in the United States) –but who would be disposed to occupy full time jobs– as well as persons who have abandoned the search for work during the past year (1.8 millions) but who would eventually return ad add themselves to the labour force –the unemployment rate is close to 10.3%.

The “secular stagnation”

If the Federal Reserve maintains since December of 2008 the “federal funds rate” between 0 and 0.25%, this has not produced massive investments that would, with this proportion, push the employment creation in the whole country. The same thing happens in the case of “Quantitative Easing”, measures that have contributing little or nothing to lessen the economic deterioration of the ordinary US worker.

Ben S. Bernanke, the last President of the Federal Reserve, announced in December of 2008 the purchase of “asset-backed securities” and in November of 2010 the acquisition of US Treasury bonds, actions that, according to their own logic, should help to increase the release of credit on the part of the banks, and to maintain long term interest rates at minimum levels.

Never in the history of capitalism has there been a plan of monetary stimulus of such magnitude: monthly injections of liquidity equaling 85 billion US dollars. As a consequence of this policy, the multi-million purchases of actions multiplied the size of the balance sheet of the Federal Reserve by five, which went from 870 billion US dollars to more than 4.5 trillion US dollars from August of 2007 to November of 2014.

The great beneficiaries of this were the big investment banks: Citigroup, Goldman Sachs, J.P. Morgan Chase, Bank of America, Morgan Stanley, etc. Instead of supporting the development of productive activity and the generation of quality jobs, the “unconventional” monetary policy implemented by the Federal Reserve promoted the “irrational exuberance” of the interventionists on Wall Street. On the other hand, in the economy as a whole the “process of recovery” continued to be weak and unequal.

Larry Summers, who was in charge of the Treasury Department from 19999 to 2001 under the Presidency of Bill Clinton, at the end of 2013 borrowed the concept of “secular stagnation” to analyze the condition of the North American economy, the same expression that the economist Alvin Hansen (1887-1975) employed in the decade of 1930, in the full “Great Depression” [5].

According to Summers, even if it be certain that the stock markets have reached the levels of capitalization observed before the outbreak of the “subprime” crisis – thanks to the stimulus policies of the central banks – the countries that make up the G-7 (Germany, Canada, United States, France, Italy, Japan and the United Kingdom) continue to register deceptive rates of growth.

In the specific case of the United States, there is no doubt that for several years there exists a “new economic normality”, characterized by high levels of public and private debt, little inversion of capital and little creation of marginal employment. The problem is that the arsenal of the North American State has shown itself incapable of combating the recessive tendencies that creep up on the economy [6].

The Federal Reserve is divided

There is still no consensus among those who make up the Federal Reserve as to increase or not the “federal funds rate” of interest. Before deciding action, the Federal Reserve has a meeting today and tomorrow [7]. The major preoccupation of the monetary authorities of the United States is the rise and fall of prices. And deflation is much more harmful for the economy than is high inflation.

When businesses lower the prices of their merchandise, consumers begin to put off their buying, hoping that prices will continue to fall. The capitalists find themselves with the demand level in free fall, and in consequence, lower the levels of production and lay off workers.

The incomes of consumers fall, contracting even more the level of demand. Then businesses lower even more production and employment, sunk in a depressive spiral that combines deflation and the fall of the GDP. At the same time, the debts of the enterprises become onerous, payments lessen and the solvency of the banks becomes serious.

The great enigma for the Treasury Department and the Federal Reserve is that in spite of fiscal and monetary stimuli, the level of prices remains under 2% for the past three years –with the exception of a slight increase in 2014. During July the Consumer Price Index hardly increased 0.2% in the interannual comparison. If we exclude the prices of food and energy, inflation stood at 1.2%

For various members of the Federal Open Market Committee, even though inflation was pressuring towards a lower level, this is but a transitory phenomenon, due to the rise of the dollar and the deflation of commodity prices. “Given the apparent stability in the outlook for inflation, there are good reasons to believe that inflation will increase as the forces that keep it low dissipate even more”, according to Stanley Fischer, Vice–President of the Federal Reserve.

The current president, Janet Yellen, believes that raising interest is decisive to avoid distortions in the economy. If we maintain interest close to zero over a large period, Yellen argues, there is a danger of fomenting financial bubbles, since cheap credit feeds speculative gambling in investment banks.

Nevertheless, if the cost of credit is raised, the possibilities of a recession are increased. Every time wages were stagnant since the decade of the 1970s, their impulse on inflation is marginal. New jobs have been insufficient to increase the general level of prices. Last month wage increases per hour only grew 2.2% in comparison with 2014, while before the crisis they grew by 4%.

And now what happens?

The Federal Reserve is trapped. It is impossible to slow stock market growth without increasing at the same time deflationary risks on the economy. If the federal funds rate remains intact, it will be evident that the United States is much more vulnerable than the world has believed.

The financial bubble continues to creep up and sooner rather than later it will explode [8]. During the month of August there was major turbulence in the global economy: a fall in the Dow Jones index of more than 1000 points; successive falls in the Shanghai market, a new recession in Japan, stagnancy in France and the United Kingdom, an increase in deflation in Greece, and drastic deceleration in the countries of Latin America and the Caribbean, etc.

Now, if the Federal Reserve gambles on raising interest rates, the “transitory” elements that may undermine inflation – in the opinion of Stanley Fischer – will gather greater force. That is to say, the rise of the dollar will be more pronounced in the face of massive outpouring of capital from emerging markets. The same thing will happen with the fall of prices of commodities, investors will detach themselves immediately from financial instruments related to energy, with which the United States will register a rate of inflation that is very low, ready to sink into deflation.

The fragility of the world economy has to date sabotaged the pretensions of central banks to tighten monetary policy in recent years [9]. The European Central Bank (ECB), the Bank of Japan and the Riksbank (the central bank of Sweden) took a step backward little after raising the reference interest rates. As inflation commenced to fall, the economy again entered into recession and the debt level grew, so that the central banks of industrialized countries had no alternative but to return to interest rates close to zero.

The Federal Reserve for their part, as made it clear that an increase in types of interest will be very slow. That is to say, after the first increase –which if it doesn’t happen in September, could take place in October and December of this year, or as suggested by the International Monetary Fund (IMF) [10] and the World Bank [11], until 2016 – will wait a long time before another increase.

Nevertheless, if the measure precipitated by the drop in the GDP consolidates deflation, the Federal reserve will not only be buried in absolute discredit, but after returning to lower interest rates, would be obliged to put into place a fourth stage in their programme of “Quantitative Easing” [12], as was previously done in November of 2014.

To sum things up, at 7 years from the bankruptcy of Lehman Brothers the US economy is up in the air. The thousands of millions of US dollars spent to save the New York bankers put public finances in bankruptcy and sunk hundreds of families into misery. The curse of a new crisis has still not disappeared. If the Federal Reserve makes a mistake, the nightmare of deflation may become a sad reality for the United States.

Jordan Bishop
Russia Today (Russia)

[1«As Economies Gasp Globally, U.S. Growth Quickens», Nelson D. Schwartz, The New York Times, August 27, 2015.

[2«The Employment Situation in August», Jason Furman, The White House, September 4, 2015.

[4«The Federal Reserve: More red lights than green», The Economist, September 12, 2015.

[5«Why stagnation might prove to be the new normal», Lawrence Summers, The Financial Times, December 15, 2013.

[6«U.S. Lacks Ammo for Next Economic Crisis», Jon Hilsenrath & Nick Timiraos, The Wall Street Journal, August 17, 2015.

[7Editor’s note: the author refers to the meeting held on 16 and 17 September.

[8«Fears grow over US stock market bubble», John Authers, The Financial Times, September 13, 2015.

[9«A brief history of rate rises: Tightening pains», The Economist, September 12, 2015.

[10«IMF Urges Fed to Postpone Rate Liftoff to First Half of 2016», Kasia Klimasinska & Andrew Mayeda, Bloomberg, June 4, 2015.

[11«World Bank chief economist warns Fed to delay rate rise», Shawn Donnan & Sam Fleming, The Financial Times, September 9, 2015.

[12«Market talk suddenly turns to specter of QE4», Jeff Cox, CNBC, August 24, 2015.