Federal Reserve talks jobs, but (in)action speaks louder than words

If you haven’t gotten a pay raise lately, you are not alone. The percentage of U.S. workers reporting no change in their renumeration remains near its all-time high, according to statistics kept by the San Francisco branch of the Federal Reserve.

The San Francisco Fed’s “wage rigidity meter” — the percentage of “job stayers” who report receiving the same pay as one year earlier, rose above 15 percent in 2010 and has remained there since. For comparison, that figure was 11 percent in 2008, at the start of the global economic downturn and about six percent in the early 1980s, when this statistic first began to be tracked. For hourly workers, not surprisingly, conditions are even worse: More than 20 percent report no increase in pay, about triple the number in the early 1980s.

That is merely one additional piece of evidence — if any more be needed — that inequality is on the rise. Reuters reports that there is some discussion within the Federal Reserve to temporarily tolerate higher inflation as a “tradeoff” to encourage growth in wages and an accompanying boost to full-time employment. How serious this talk actually is might be signaled by this paragraph in the same Reuters report:

“Fed staff economists accepted in 2010 that labor’s share of annual U.S. output, which over a decade had dropped to around 56 percent from its long-term average of around 62 percent, was unlikely to recover.”

In other words, the Federal Reserve says inequality is here to stay. So perhaps tinkering with policy that possibly could make a marginal difference — even the Fed has to keep up appearances sometimes — is the most that might be expected. Contrast that with the enthusiasm with which the Fed has shoveled money into its “quantitative easing” programs — measures that have primarily acted to inflate a new stock-market bubble with a small secondary effect of re-animating real estate prices.

(Graphic by the U.S. Bureau of Labor Statistics)

(Graphic by the U.S. Bureau of Labor Statistics)

“Quantitative easing” is the technical name for a central bank going on an asset buying spree. In conjunction with setting low interest rates, it is a theoretical attempt to stimulate the economy by encouraging investment. The Federal Reserve’s program buys U.S. government debt and mortgage-backed securities in massive amounts.

Through the end of June 2014, the Fed poured about US$4.1 trillion into three quantitative-easing programs since December 2008. The Bank of England had committed £375 billion to its Q.E. program as of the end of 2013.

Prior to the economic downturn, the Fed held between $700 billion and $800 billion of U.S. Treasury notes on its balance sheet, but, because of its quantitative-easing programs, it now holds more than $4 trillion. The Fed is in the process of winding down its buying spree with an intent to finish it in October. Instability is likely to occur when the Fed tries to unload its bloated piles of assets, and many of the world’s other central banks will seek to unload their assets as well.

The latest stock-market bubble, then, will burst as all others before it, with high debt loads dropping another anchor on the economy. A commentary in Forbes calculates that the level of borrowing used to buy stocks is already higher than it ever was during the 1990s stock-market bubble or the run-up before the 2008 crash as measured in inflation-adjusted dollars or as a ratio with the S&P 500 stock index.

What could the world’s governments have done with this massive amount of money had it instead gone to socially useful programs? Instead, trillions of dollars were spent to inflate another stock-market bubble. One more way the world’s wealthiest have gotten fatter while the sacrifices are borne by the rest of us.

And that is merely one way that inequality not only continues to grow, but is accelerating. From 2000 to 2009, labor productivity rose an average of 2.5 percent annually while real hourly wages rose only 1.1 percent, according to U.S. Bureau of Labor Statistics calculations — the biggest gap it has yet measured, going back to the late 1940s.

(Graphic by the U.S. Bureau of Labor Statistics)

(Graphic by the U.S. Bureau of Labor Statistics)

More recent figures, according to Reuters, indicate the gap continues to grow — from 2007 to today, average hourly wages have risen a total of 1.5 percent while productivity has increased by 11.4 percent. Nor is that a phenomenon limited to the United States. The International Labour Organisation calculates that wages in the world’s developed countries increased six percent from 1999 to 2011 while labor productivity increased about 15 percent.

If the employees are not receiving the benefits from their increased productivity, then it is the bosses and speculators who are grabbing it. Thus it is no surprise that the gap in wealth has increased more sharply than have incomes. A research paper written by Fabian T. Pfeffer, Sheldon Danziger and Robert F. Schoeni found that accumulated wealth has decreased for the majority of people since 1984. The median level of net worth — that is, the 50th percentile or the point where the number of people with more is equal to the number with less — has decreased by about 20 percent since 1984. By contrast, those at the 95th percentile have nearly doubled their net worth since 1984.

So much money has flowed upward that industrialists and financiers, and the corporations they control, have more money than they can possibly find investment for — this money is diverted into increasingly risky speculation in an attempt to find higher returns. Working people were handed the bill for the previous bubbles, and before we can get back on our feet the bursting of another bubble looms. Class war is raging, and it’s clear what side is winning.

The Federal Reserve inflates another bubble, but not for you

If you haven’t experienced the “recovery” from the Great Recession the corporate media keeps insisting is here, that’s because “quantitative easing” is a new way to say “trickle-down.” In this latest version, the Federal Reserve has pumped trillions of dollars into financial markets to create a stock market bubble.

Panic at the New York Stock Exchange (image via U.S. Library of Congress)

Panic at the New York Stock Exchange (image via U.S. Library of Congress)

Other than a small secondary effect of re-animating real estate prices, a growing bubble in stock prices has constituted the extent of the economic impact. Good for the one percent, not so good for the rest of us.

“Quantitative easing” is the technical name for a Federal Reserve program in which it buys U.S. government debt and mortgage-backed securities in massive amounts. In conjunction with keeping interest rates near zero, quantitative easing is supposedly intended to stimulate the economy by encouraging investment. A reduction in long-term interests rates would encourage working people to buy or refinance homes; for businesses to invest because they could borrow cheaply; and push down the value of the dollar, thereby boosting exports by making U.S.-made products more competitive.

In real life, however, the effect has been an upward distribution of money and an increase in speculation. This new form of trickle-down has not worked any differently than it did during the Reagan administration. Now that the Federal Reserve will gradually reduce the amount of bonds it purchases (announced last month) and perhaps end the program by the end of 2014, Wall Street and corporate executives worry that their latest party might be over.

What hasn’t changed, and won’t anytime soon, is the weakness of the global economy, particularly for the world’s advanced capitalist countries. If you aren’t making enough money to get by, you aren’t planning a shopping spree. If working people, collectively, continue to see wages erode, happy days are not at hand. They aren’t.

The top one percent has captured almost all of the “recovery,” which is why the corporate media continues to peddle its mantra. Emmanuel Saez, an economist at the University of California, calculates that 95 percent of all U.S. income gains from 2009 to 2012 went to the top one percent. That result is an intensification of a pattern — Professor Saez calculates that 68 percent of all income gains for the longer period of 1993 to 2012 went to the top one percent.

Fueling a speculative binge

How is this connected to quantitative easing? The money borrowed by corporations has not gone toward investment or hiring new workers, but rather into buying back stock and speculation. Financiers and executives riding the crest of this wave of cheap money in turn use their gains to further speculate, or to buy expensive works of art, itself speculation that the wildly rising prices for collectible works will continue.

U.S. corporations bought back about $750 billion of their stock in 2013. When a corporation buys back its stock, it is spreading its profits among fewer stockholders, thereby boosting its stock price. That’s more profits for financiers and bigger bonuses for executives, achieved without investing in the enterprise.

The billionaire Stanley Druckenmiller in a television interview called the Federal Reserve’s quantitative easing program:

“[T]he biggest redistribution of wealth from the middle class and the poor to the rich ever. … I mean, maybe this trickle-down monetary policy that gives money to billionaires and hopefully we go spend it is going to work. But it hasn’t worked for five years.”

Mr. Druckenmiller said this on CNBC, a cable-television business news station whose anchors openly cheer news of rising corporate profits and celebrate wealth accumulation. The “five years” he mentioned is a reference to the three successive programs of quantitative easing that began in the final weeks of the Bush II/Cheney administration. In a separate report, CNBC journalist Robert Frank writes that it has become “increasingly clear” that the wealthiest one percent are the big winners:

“The largesse of the Federal Reserve over the past five years has amounted to one of the largest ever subsidies to the American wealthy — fueling record fortunes, record numbers of new millionaires and billionaires, and an unprecedented shopping spree for everything from Ferraris to Francis Bacon paintings. The prices of the assets owned by the wealthy, and the things they buy, have gone parabolic, bearing little relationship to the weak, broader economy. …

Fed policy has fueled a surge in the value of financial assets. Since the wealthiest 5 percent of Americans own 60 percent of financial assets, and the top 10 percent own 80 percent of the stocks, those gains in financial assets have gone disproportionately to a small group at the top.”

Stock prices reaching unsustainable levels

More speculative money is poured into stock markets because the heavy Federal Reserve buying of bonds dampens demand in that sector. Ted Levin, writing for the business publication SmallCap Network, summarizes this effect:

“[Q]uantitative easing involves buying long-term bonds, which in turn drives down the interest rates on these. The reason for this is that when there is a strong demand for bonds — which is exactly what quantitative easing artificially creates — bond issuers do not have to offer such high interest rates in order to attract investors. This in turn means that bonds are less attractive to non-governmental investors, and so they turn to stocks instead — driving up the price.

The second reason is that quantitative easing makes more capital available to businesses at lower rates. This allows them to swap high-cost debt for low-cost debt and buy back stock — improving their earnings per share and driving up the value of the remaining stock.”

The most basic measure of a stock, or the stock markets as a whole, is the “price/earnings ratio.” The P/E ratio is a company’s yearly profit divided by the price of one share. As of January 14, the P/E ratio for the S&P 500, the standard barometer, was at about 19.5 and has been rising steadily the past couple of years. A handful of times in history, the P/E ratio has risen above 20, only to crash each time. The historical average is 14.5 — meaning that stocks are currently overvalued.

Stock prices have become unmoored from underlying economic conditions — and are frequently pure speculation. Most trading is done through computer programs, often with a stock bought and sold in fractions of a second to take advantage of quick pricing changes, and increasingly exotic derivatives to draw in ever more speculative money by the wealthy who are awash in far more money that can possibly invest rationally.

Wall Street’s party will wind down as slowly and gently as the Federal Reserve can manage, and it may yet reverse itself and continue its quantitative-easing program. As of the end of December 2013, the Fed has spent a total of $3.7 trillion over five years on quantitative easing and the Bank of England has committed £375 billion to its quantitative easing.

How much could these enormous sums of money have benefited working people had this money instead been used to create jobs directly or for productive social investment? And these barrels of money thrown to financiers are merely the latest tranches — the U.S., E.U., Japan and China committed 16.3 trillion dollars in 2008 and 2009 alone on bailouts of the financiers who brought down the global economy and, to a far smaller extent, for economic stimulus. For the rest of us, it’s been austerity and mounting inequality.

Going beyond the obvious question of why such absurdly one-sided policies should be tolerated, it also necessary to ask: Why do we continue to believe an economic system that requires such massive subsidies “works”?

It’s not the Federal Reserve, it’s the system it serves

By Pete Dolack

There are details, and then there is the big picture. Mistaking the former for the latter can send an activist down the wrong path. A good example of this are the often well-meaning people who resolutely demand that we “End the Fed.”

But the problem isn’t the Federal Reserve, it is the system that it serves. If you don’t like the Fed, what you actually don’t like is the capitalist system.

The Federal Reserve, the central bank of the United States, is surely (as its critics accurately charge) a far too secretive, unaccountable branch of government that protects the interests of financiers at the expense of everybody else. A democratically accountable Fed that promulgated policies to increase employment and toward a socially responsible financial system would be welcome reforms.

But they would be unstable reforms, tinkering at the margins and would likely not change Fed policy in dramatic ways. Moreover, increasing oversight on the Fed wouldn’t eliminate the dominance of Wall Street or the largest corporations. There is plenty of oversight of other U.S. government agencies, yet corporate interests have little trouble bending policies toward their preferred outcomes.

Going further, and abolishing the whole thing, is, to be blunt, not a serious demand. Eliminating the Fed is a pointless idea because a central bank is a necessity in an advanced capitalist country, which is why each has one. And, perversely, eliminating the central bank would actually increase the dominance of financiers and would make the booms and busts of the capitalist business cycle sharper than they already are.

Strange as it seems today, when many voices on the Right and the Left echo the demand of “End the Fed,” there was a populist component to the creation of the Fed. Populists of the late 19th century wanted a more elastic currency so that the government could extend emergency credit when the economy collapsed (as it then frequently did) rather than be handcuffed by the gold standard.* In those days, when a crash happened, the U.S. government had to turn to the biggest robber barons of the day, such as J.P. Morgan, and ask them directly for a bailout.

Banks hoarded their reserves during crashes, making the downturns worse, and could issue their own banknotes, helping to fuel bubbles. But, since we are talking about the United States, it took a consensus on Wall Street and not popular demand for a central bank to be created in 1913. Financiers had come to believe that a central bank would temper the extremes of booms and busts, thereby stabilizing the economy. Industrialists joined financiers in that consensus.

Needless to say, the capitalists and not the populists were the drivers of Fed policy from the beginning. But a central bank does, albeit in a highly inegalitarian manner, stabilize a national economy through regulating credit and alternately tightening and loosening monetary policy. Central banks in all advanced capitalist countries manage domestic money supplies and currencies, a crucial task in today’s world in which markets subject to wild swings set prices for everything. The exception is in the countries using the euro, in which national central banks don’t have a currency to manage and are subordinate to the supranational European Central Bank, which is even more unaccountable than national-level central banks.

It won’t come as a surprise that financial institutions are skilled at finding ways around central bank policies. And central banks don’t necessarily do good, either — the Fed under Alan Greenspan encouraged the 1990s stock market bubble and the real estate bubble of the 2000s, and the post-crash Fed of Ben Bernanke is focused on the non-existent phantom of inflation while ignoring the all too real problem of high unemployment. The European Central Bank is, if anything, even more guilty of that than the Fed. The Fed, typical of central banks, is an institution staffed by and ideologically dependent on the financial industry. So it is no surprise that it consistently acts in a manner that benefits the financial industry and is detrimental to working people.

The entire capitalist system acts to benefit capitalists (industrialists and financiers) to the detriment of working people. Why should we expect an arm of a capitalist government to act any different? (Contrary to popular mythology, the Fed is part of the government, the Treasury Department to be specific; its all-powerful chair and board of governors are appointed by the president and approved by the Senate.)

If the Fed were eliminated, the exact same powerful capitalist interests would continue to bend government policy to their preferred outcome and would continue to exercise the same dominance over government, social institutions and the mass media. The only difference would be that the economy would become more unstable than it already is because there would be less ability on the part of government to dampen excesses. Why would that be good?

Concomitant to “End the Fed,” for those on the Right who echo that slogan, is a yearning to return the U.S. dollar to the gold standard. Most of these people do yearn for the good old days of the 19th century, when women, minorities and working people knew their place, and paid a violent price if they didn’t. I’ll pass over the irony of working people yearning for such a time. Unfortunately for gold fetishists, there is no returning to those simple times as capitalism has evolved into a much more complicated system. Capitalism can no longer function under a gold standard and indeed outgrew it in the 1970s.

Richard Nixon, then the U.S. president, pulled the dollar off the gold standard because retaining it was no longer in the interest of the U.S. despite the dollar’s centrality in the Bretton Woods system of fixed currency rates. In that system, implemented at the end of World War II, the dollar was fixed to the price of gold and all other currencies were fixed to the dollar; governments could and did change the value of their currencies based on their particular interests. Doing so was a big deal.

Such a system is more stable than the current one of free-floating currencies that continually rise and fall in foreign-exchange markets. Today’s system is heavily skewed by speculators, and it is precisely the pressure of financial speculators that began to burst the system of fixed exchange rates — today, the size of foreign-exchange markets dwarfs the size of stock markets and those traders are not about to forgo their profits.

There is too much special interest by financiers and speculators to allow a resumption of a gold standard. Going back on the gold standard would also handcuff governments trying to stimulate economies during economic downturns because they would not be able to issue new money. The supply of money would be determined by the productivity of South African gold mines, a rather odd circumstance. Moreover, gold is a commodity the same as any other; despite the fetishes that attach to it there is nothing more intrinsic to valuing money on it than on any other commodity. Why not tie the dollar to aluminum?

Capitalism is an unstable system that will always have booms and busts, and as time goes on the busts tend to worsen. (That tendency was temporarily kept at bay after the Great Depression by significant reforms, but those reforms have been undone and the tendency has reasserted itself.) Capitalism is a system in which those who amass the capital thereby amass power, and power translates into the ability to bend the rules to preferred outcomes or to bypass the rules. Money concentrates into fewer hands and wages are squeezed to facilitate the upward flow of money. Those who succeed are the people endowed with outsized desires to acquire and the personality traits that enable those desires to be met.

Yes, those people so endowed can and do create policy for the Fed, or any central bank. But ending the Fed wouldn’t touch the ability of people so endowed to suffuse their viewpoints and favored policy outcomes throughout a capitalist society, nor would it touch their ability to leverage their outsized wealth and the power their wealth gives them to shape government policy to benefit themselves.

Getting rid of government would actually intensify the dominance of industrialists and financiers in all spheres of life. The dominance of a globalized class that maintains power through a web of institutions and scrambles to manage ceaseless instability — not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

If you don’t like what the Fed does, it is because you don’t like what the capitalist system does. Blaming the central bank is no more than blaming the messenger.

* This and the following paragraph are based on the book Wall Street by Doug Henwood, pages 92 to 95 [Verso, 1998]