Fed ups rates while workers face grinding depression

BY BRIAN WILLIAMS

Federal Reserve Bank Chairwoman Janet Yellen announced Dec. 16 the national bank was raising its base interest rate to 0.25 percent, up from the zero percent that has been in effect for the past seven years. Yellen and the Fed claim the U.S. capitalist economy is back to full employment and healthy growth, and has to be protected from over-heating.

But in fact their moves take place under grinding depression conditions for working people and the capitalist economy worldwide is entering a period of manufacturing contraction.

There’s no government monetary or fiscal policy that can reverse this deepening economic crisis, which is rooted in a decades-long trend of a declining rate of profit and a slowdown in capitalist production, trade and employment.

In response to the steep economic downturn beginning in 2008, the government dropped interest rates effectively to zero as a “stimulus” measure, coupled with a “quantitative easing” money-printing scheme, to pump funds into the financial system. They claimed easy money would boost investment, production and jobs.

But for the vast majority of bosses it simply isn’t profitable to invest in expanding productive capacity and hire more workers. Instead, the propertied families ploughed their idle cash into all kinds of fictitious capital, speculating on stocks, bonds, derivatives and other paper values, where the rate of return promised to be much greater than industrial production.

“The Federal Reserve has actively encouraged the channeling of trillions of dollars … into speculation,” wrote fund manager John Hussman in a Dec. 14 letter to investors.

“Market conditions presently feature a Pandora’s Box of rich valuation, vulnerable profit margins, rising default risk, rapidly deteriorating market internals, failing support levels, and accumulating evidence of oncoming recession,” he said.

Some bourgeois economists and financial commentators have challenged the Fed’s moves, fearing it will worsen capitalism’s crisis. “This is a time of considerable financial and geopolitical fragility around the world,” wrote former Treasury Secretary Larry Summers in the Dec. 15 Washington Post. The rate increase, he says, risks “setting off instability which could snowball.”

Over years of zero interest rates, many investors poured funds into what Wall Street calls junk bonds, with high interest rates based on greater risk of default; real estate schemes; and all kinds of stocks, bonds and government paper throughout “emerging markets” — semicolonial countries in Asia, Latin America and Africa.

But much of this is starting to come apart. The $1.3 trillion junk bond market — more than $700 billion of which was issued in 2012 and 2013 — is on course for big losses for the first time in seven years.

The money ploughed into speculative endeavors in the semicolonial world — not to develop production but to profit off interest payments — have exploded government debts there owed to U.S. investors to $3.4 trillion. With much of this debt increasingly unpayable, panicky investors have hurried to withdraw $500 billion from these markets.

Of the 22 largest “emerging markets” tracked by U.S. banking behemoth J.P. Morgan, 21 have had their economic forecast downgraded. The lone exception, the Czech Republic, is projected to stay flat. Seeing the handwriting on the wall, Brazil’s finance minister Joaquim Levy resigned Dec. 18.

Declining industrial output

U.S. industrial output had its sharpest decline in more than three and a half years in November, dropping 0.6 percent. This was the third straight month of declines, with a sharp drop in mining production and oil and gas well drilling. Eighteen percent of oil rigs have halted output over the past several months.

The drop in production and jobs in China, the world’s second-largest economy, is generating workers’ resistance to factory closures and job cuts. Industrial employment in China has fallen to the lowest level since 2000, reported the Financial Times, including a 12 percent cut in iron ore miners.

Strikes and labor protests are on the rise, nearly doubling in the first 11 months of 2015 to 2,354, according to the Hong Kong-based China Labour Bulletin.

The contraction of production in China has sent ripples across the capitalist world. Over the past year, the S&P Goldman Sachs Commodity Index has fallen to its lowest level since the 2008 financial crisis. Base metals are down 49 percent from their highs nearly five years ago. At the same time U.S. crude inventories climbed to the highest level for this time of year since 1930.

Working people bear the brunt of the economic crisis, as bosses try to shore up profits by attacks on wages, safety and social protections. A recent Pew Research Center survey reports that one-fifth of U.S. adults now live in or near poverty levels. There are 48.9 million adults who are part of a three-person household earning less than $31,402 a year — up from 43.2 million in 2008 and 21.6 million in 1971. About half of these workers are part of households making less than $19,000.

Despite official government figures, real unemployment remains well above the 5 percent official rate. Millions more are without a full-time job and the labor force participation rate is at a nearly four-decade low. “Cooling off” the economy is likely to make things worse.

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