The Militant (logo)  

Vol. 78/No. 1      January 6, 2014

Rulers fiddle with monetary
policy, as jobs crisis persists
(lead article)
As Ben Bernanke, chairman of the Federal Reserve, prepares to hand over the appointed post to Obama administration pick Janet Yellen, he announced Dec. 13 plans to taper the Fed’s “quantitative easing” monetary scheme, whose stated purpose was to “stimulate” economic activity following the world financial crisis of 2008-2009. Meanwhile, working people continue to bear the brunt of a capitalist crisis for which the propertied rulers have no solution.

The announcement provided a new talking point in the sharp debates among capitalist economists over the Fed’s policies, much of which reflects their difficulty in accepting that the world economic crisis is neither the result of any government policy nor can any such policy do anything to reverse it. It is rather the result of a decades-long trend rooted in a slowdown in growth of world capitalist production and trade.

Nevertheless, U.S. news media presented the tapering plan as connected to an upturn in the U.S. economy. “U.S. Economy Begins to Hit Growth Stride,” headlined a Dec. 20 Wall Street Journal article that said the recovery that “chugged along in fits and starts builds up a head of steam going into the new year.”

“Growth is picking up,” International Monetary Fund Managing Director Christine Lagarde told NBC’s “Meet the Press” news program. “And unemployment is going down. So all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast.”

Stock prices surged in response, with the Dow Jones Industrial Average rising 157 points the day of the tapering announcement.

But more than five years since the so-called recovery from the 2008-2009 recession began, there’s been no recovery for working people. The proportion of the population with a job remains at record-low numbers, production has only recently reached pre-recession levels and living standards for working people continue to decline. To the degree the bosses are reaping profits despite the world economic crisis, it’s off our backs.

Despite short-term fluctuations in business cycle indicators — consumer spending rose 2 percent this summer but is the weakest over the December holiday season in four years and the output of goods and services for the third-quarter topped 4 percent for only the second time since 2009.

Under quantitative easing, the Federal Reserve has been buying mortgage-backed securities from banks and $85 billion of government bonds monthly. Bernanke’s announcement was to begin tapering this amount by $10 billion starting in January.

This small step toward weaning the capitalists off quantitative easing — what is often characterized as a giant money-printing operation — comes amid growing concern within the U.S. ruling class over its long-term effects on the value of the dollar.

At the same time, these concerns are tempered by their worry that capitalists might dial back investments in response to an end of the monetary prodding — investments that have overwhelmingly been directed toward financial speculation.

The capitalists’ dilemma over quantitative easing was summed up by Stanley Fischer, the leading candidate to become vice chairman of the Federal Reserve. The Fed’s bond-buying campaign is “dangerous” but “necessary,” he told the Wall Street Journal CEO Council meeting in November.

Bosses not expanding production

Quantitative easing was put in place after the Federal Reserve in December 2008 lowered interest rates to nearly zero. The combined aim of these two measures was to make borrowing cheaper for companies, which supposedly would encourage them to boost production and hire workers. But under conditions of an economic slowdown, it has not been profitable for the great majority of bosses to do so. Instead, they have tended to sit on hoards of cash reserves or seek higher returns through investing it in stocks or other forms of speculative bets, such as on the rise or fall of various kinds of commercial paper.

These profits have been based not on economic growth, but speculative hopes of such growth in the future, along with expectations of continued monetary stimulus and fears of missing out on the moment.

As a result, speculative bubbles are being reinflated and leveraged loans are at all-time highs. For example, the $3.8 trillion in the Federal Reserve’s coffers in October — the vast majority of which are mortgage-backed securities and Treasury bonds — is leveraged 70 times over the actual deposits and circulation notes it has on hand.

Stock prices, which have risen 40 percent in 18 months, have little correlation to corporate earnings. They’re overvalued and overbought based on investors “hoping for substantial growth to eventually resume,” writes investment manager Sheraz Mian.

Within the broad spectrum of the bourgeois debate over the Fed’s monetary schemes are some analysts who argue that their effects on capitalists’ behavior have been more psychological than anything else.

“We’re faced with a speculative advance that seems unstoppable, despite the absence of any reliable mechanistic link between quantitative easing and stock prices — only a combination of superstition and yield-seeking that has repeatedly ended badly,” wrote financial analyst John Hussman in early December. “The bubble expands not on facts, but on untethered imagination.” It “advances as long as the adherents it gains are more eager than those it loses. What stops the bubble is not the concept itself hitting a brick wall, but the pool of new adherents being exhausted.”

‘Secular stagnation’

Noting the different characteristics of the period before and following the most recent 2008-2009 recession, compared with those following previous recessions, former U.S. Treasury Secretary Lawrence Summers referred to the current crisis in the U.S. as not simply a dip in the business cycle, but as “secular stagnation,” borrowing a phrase used by many to describe the decline of the Japanese economy over the last two decades.

Speaking Nov. 8 at an International Monetary Fund forum in Washington, D.C., titled “Policy Responses to Crises,” Summers’ primary audience was the U.S. propertied rulers. His key message was to plan for a protracted period of stagnating production, trade and employment. Among other things, he argued that the Federal Reserve’s monetary tinkering was an unprecedented but necessary measure to avert a world financial meltdown in face of a crisis unprecedented in its scope and worldwide character.

The size of the U.S. workforce has been shrinking, he noted. “The share of men or women or adults in the United States who are working today is essentially the same as it was four years ago,” Summers told the conference. You’d “kind of expect that once things normalized you’d get more GDP [gross domestic product] than you otherwise would have had, not that four years later you’d still be having substantially less than you had before.”
Related articles:
Trotsky on the curve of capitalist development
Front page (for this issue) | Home | Text-version home