Central banks have trillions for speculation, none for people

There’s no money for schools, no money for social services, no money for the environment. There is lots of money for speculators, however. A tsunami of money. Money that is measured in the trillions.

The central banks of the United States, Britain, the eurozone and Japan have so far spent US$6.57 trillion (or €6.06 trillion if you prefer) on “quantitative easing” programs. And, for all of that incomprehensibly gigantic sum of money, what mostly has been accomplished is a stock market bubble. And, as a secondary effect, a boost to real estate prices, making real estate speculation pay off a bit more than it ordinarily does.

(Photo by Photo Dharma from Penang, Malaysia)

(Photo by Photo Dharma from Penang, Malaysia)

Oh, no so much for the overall economy you say? Hard to argue that point. The world’s advanced capitalist countries are mired in stagnation, structural unemployment and widening inequality, with public investment starved and personal debt a monumental problem. Surely those staggering sums of money could have been put to better use. We’ll get to that in a moment, but first a quick accounting. Money spent on quantitative easing is as follows:

  • Federal Reserve: $4.1 trillion in three programs that ended in November 2014.
  • European Central Bank: €600 billion so far; the ECB has committed to spending a total of €1.1 trillion through March 2017.
  • Bank of England: £375 billion.
  • Bank of Japan: ¥155 trillion so far in two and a half years; the Japanese central bank is committed to spending ¥80 trillion per year with no ending date.

“Quantitative easing” is the technical name for central banks buying their own government’s debt in massive amounts; in the case of the Federal Reserve it also bought mortgage-backed securities. The supposed purpose of quantitative-easing programs is to stimulate the economy by encouraging investment. Under this theory, a reduction in long-term interest rates would encourage working people to buy or refinance homes; encourage businesses to invest because they could borrow cheaply; and push down the value of the currency, thereby boosting exports by making locally made products more competitive.

In actuality, quantitative-easing programs cause the interest rates on bonds to fall because a central bank buying bonds in bulk significantly increases demand for them, enabling bond sellers to offer lower interest rates. Seeking assets with a better potential payoff, speculators buy stock instead, driving up stock prices and inflating a stock-market bubble. Money not used in speculation ends up parked in bank coffers, boosting bank profits, or is borrowed by businesses to buy back more of their stock, another method of driving up stock prices without making any investments.

The irrationality of more for those with more

Given that banks are bigger and more profitable than ever (the six biggest U.S. banks racked up a composite net income of US$75 billion in 2014) and U.S. corporations spend about $1 trillion per year buying stock to artificially boost stock prices, shoveling still more money to those with far more than can be spent or invested in any rational way is irrational, no matter how many reports are pumped out by think tanks they pay to tell them otherwise.

So what might have been done with those quantitative-easing trillions thrown at banks instead? The total student debt in the United States, where the costs of higher education has risen more than double the rate of inflation since 1982, is $1.3 trillion as of October 2015. Printing the money to cover the entirety of the country’s student debt would total less than one-third of what the Federal Reserve spent on inflating a stock-market bubble. That leaves many more needs to be addressed.

The infrastructure of the U.S. is crumbling, and governments are short of money to fix what needs to be fixed. The investment needed to modernize and maintain school facilities is estimated to be at least $270 billion. The foreseeable cost of maintaining water systems in the coming decades in the U.S. is estimated at $1 trillion. The American Water Works Association arrives at this total by assuming each of 240,000 water main breaks per year would require the replacement of a pipe. Capital investment needs for wastewater and stormwater systems are estimated to require another $298 billion over the next 20 years.

The shortfall of funding to clean up Superfund sites is estimated to be as much as $500 million per year. The Environmental Protection Agency estimates that one in four United Statesians lives within three miles of a hazardous waste site; more than 400,000 contaminated sites await cleanup. And we can throw in another $21 billion to repair the more than 4,000 dams deemed to be deficient by the Association of State Dam Safety Officials.

Jobs instead of speculation

Add up all of the above and we would have spent a total of $3.4 trillion. Instead of throwing money at speculators and banks in the vain hopes they would spend the money productively instead of pocketing it or directing it toward speculation or boosting stock prices, we could have wiped out all student debt, fixed all the schools, rebuilt aging water and sewer systems, cleaned up contaminated industrial sites and repaired dams, and still have $700 billion more to spend on other needs.

If we were to apply that remaining $700 billion to create a federal jobs program, such as was done during the Great Depression, a total of 14 million jobs paying $50,000 and lasting one year could have been created, or three and a half million jobs paying that salary and lasting four years. That is in addition to all the people who could be put to work performing necessary infrastructure repair work if the above projects were carried out.

All of that for no more money than the Federal Reserve threw away on quantitative easing. This same argument can be made elsewhere: The British think tank Policy Exchange estimates Britain’s needs for investment in transportation, communication and water infrastructure to be a minimum of £170 billion. That is less than half of what the Bank of England spent on its quantitative-easing scheme, and dwarfs an estimated £2.5 billion deficit in the National Health Service.

Instead of spending this money on programs that would put people to work and enable them to get on their feet financially, those with more get more. European non-financial companies are estimated to be sitting on $1.1 trillion in cash, or more than 40 per cent higher than in 2008, the Financial Times reports. The St. Louis branch of the Federal Reserve estimates that, in 2011, U.S. corporations were sitting on almost $5 trillion of cash, a total likely to have increased.

This is what class warfare looks like, when only one side is waging it.


12 comments on “Central banks have trillions for speculation, none for people

  1. What enrages me even more is the compulsion that taxpayers enrich these banks even further by paying them interest on money they create out of thin air to run government services.

  2. Karl Stout says:

    Speculators are people, my friend.

  3. Joel Meyers says:

    The older name for “Qualitative Easing” is “Deficit Spending”. The semantic difference reflects the switch from financing programs beyond taxes collected, to pure financial manipulation of an otherwise exhausted and depleted economy.

    The manufacturing base, in which palpable surplus value is produced and extracted from an industrial working class, is a shadow of its former self. This is euphemized as a service economy.

    Real surplus value production is being revived to some degree by the U.S. breaking out in producing more natural gas and, increasingly, petroleum, within the US, to which fracking and other forms of environmental destructitruction are internally central.

    This is a major component in the reduction of the price of oil, which amounts to a rise in the value of the dollar. The dollar is the queen of commodities, but still a commodity, which trades with all other commodities. A self-parody of the labor theory of value would proclaim that a dollar bill and a hundred dollar bill are equal in value because they take the same labor time to produce. But they are not the same, because their value is not supposed to be the paper that they are printed on. They are supposed to represent quantities of substances such as gold or silver, which have intrinsic value.

    We know that the dollar was taken off the gold standard in 1971 by “Nixon” internationally, after banning most private gold transactions derived from jewelry and other artifacts under “Johnson”. This was done to prevent bankruptcy on an international scale, because the interrelated balances of payments and trade had led to a huge accumulation of paper and “iou” dollars, guaranteed redeemable in amounts of gold that the U.S. treasury could not come near making good on, even at the normal rate of redemption, let alone should a panic run emerge. It was a the abrupt reneging of the promises of gold guarantees that earned the U.S. dollar its reserve status.

    Toward the end of World War 2, the Bretton Woods Conference in Bretton Woods, NH, made the dollar the world’s first universal reverse currency in the capitalist world. Other countries had no or little gold to back up their currencies, and the idea was they would back their currencies with dollars, which were in turn backed with gold. The removal of the dollar from the gold standard was a disqualification of the basis of the dollar’s reserve currency status.

    Less-well known than “Nixon’s” abrupt betrayal of former guarantees of gold redemption, was a contemporaneous agreement with Saudi Arabia and OPEC. These global gas stations agreed to accept only dollars to pay for petroleum. Any country, in order to buy petroleum, would first have to trade their own currencies for yankee dollars. This Petro-Dollar monopoly regulated and undergirded the value of the dollar now, instead of the former metals. But it is a problematic media, because it is not a low-volume commodity that can be stored in a vault, controlled in its circulation, and underwrite large or small quantities of money. Rather it is a circulating fuel constantly consumed, which is burned along with its value.

    It is also delicate and unstable, because it depends on an assumed permanency of U.S. relations with OPEC and other oil producers. It is now in a disequilibrium because of the fall of the price of oil and the corresponding rise in dollar value by definition.

    Since capitalism depends on constantly expanding profits, meaning taking more money out of the economy than they put into it, do the math. There is a need for constant lubrication in ever increasing credit to bridge the gap. But each loan adds to the debt service, even as the principle grows like a cancer. Debt service eats up 24 percent of the Federal budget, or $851 billion, for example. Increasingly, these moneys go out of the bankrupt U.S.A. to dollar-loaded countries, led by China and Japan.

    This further grows out of a situation involving another economic prop of U.S. imperialism versus all competitors. U.S. imperialist allies and junior partners would allow financial dominance of the U.S. in exchange for the U.S. maintaining the military security of their ruling classes and against other countries. The cop-of-the-world role also leads to another burden on the dollar, namely, the enormous and constantly increasing military spending.

    The Military Industrial Complex is the central province of capital accumulation, with tremendous profits granted out of military paranoia, and even more, sheer corruption. A central problem is that military expenditures produce a tremendous amount of surplus value, but in the form of products which are not reincorporated into production, are not invested in increased or more efficient industrial production. Rather they compete with it, while other countries, which, on the whole have a military burden a small fraction of that of the U.S., become increasingly competitive.

    When financial debt service challenges or overwhelms surplus capital accumulation profits, that is a formula for a depression. The liberal imperialist solution is to increase deficit spending, according to the theories of John Maynard Keynes, underlying the New Deal, promulgated to overcome the world capitalist depression of 1929. Social programs and World War 2, which also destroyed capital and productive capacity, were the proposed solution, though the stock markets took until 1954 to recover.

    The theory today relies more on pumping the money through the top banks and brokerages than social programs, because the banks and brokerages engage in fractional reserve lending: For every dollar in their “reserve”, they can lend out a multiple, normally between four and five times the amount, so as to apply a greater jolt to the economy, but again building up the debt that they must be serviced. Privatized social benefits, such as retirement funds, are channeled through the banking system, making it difficult to cheer on the collapse of major finance entities because of such dependency.

    Meanwhile, the conservatives, more captive by individuals and holders of capital in their individual short-range drive, have traditionally been for hard-money austerity, and oppose deficit spending, which keeps the economy afloat from a more central perspective, and which has an appeal to the working class and closely related forces.

    But with the mounting debt service, nationally and internationally, governmental, commercial and individual, with dircect debts totaling $14 trillion, and $123 trillion in unfunded mandates, an irresistible force is meeting an unmovable object.

    The logic is the end of progress and reform as long as the capitalist dictatorship rules: We need a working class –based governance which can decisively serve human need by properly balancing public and private interests, a transition evolving towards socialism.

    • Very well said, Joel. It could also be said that “quantitative easing” is a new version of “trickle down” theory. We know how well the original Reaganite version of that worked. You’ve also pointed out the flip side of the advantages of having the world’s reserve currency: The U.S. can deficits thanks to the privileges of the dollar, but it also is forced to run deficits to prop up the world capitalist system.

      The Keynesian period was a product of its times that can’t be repeated. Mid-20th century Keynesianism depended on an industrial base and market expansion. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand.

      Those who advocate a return to Keynesianism are certainly well-meaning, but such a return is impossible. The turn to neoliberalism that began in the 1970s and took root in the 1980s is the logical culmination of capitalist development.

      • Joel Meyers says:

        Another factor undermines any context for Keynesianism, which in principle is adjustable is the fact that individuals and corporate entities are not taxed sufficiently to avoid creeping bankruptcy to a degree that no Keynesian compensation could hope to neutralize. This is over and on top of servicing crushing public and private debts, the military financial cancer, and balance of trade problems for the foreseeable future, although mitigated by the fall in fuel prices and the production of natural gas, and increasingly oil, inside the USA. which in turn tends to deflationary increase in the dollar;s value, augmented by reinforcing the international flight toward the dollar. Quantitative Easing is in effect a life support to a highly overvalued securities market. We will see what happens as the plug is pulled, or the “wattage” is lowered.

  4. Another great article, Mr. Dolack. Would that even a small percentage of the increasingly benighted bedazzled, bamboozled, propagandized and befuddled American middle class understood this.

    There is a great book by Dr. Morris Berman entitled, “Twilight of American Culture” which provides cogent analysis of a) what capitalism has done to the American citizen (now “consumer”), b)why it’s getting worse and c) what can be done and when will the whole facade hiding behind “democratic republic” rhetoric come to a (perhaps) crashing end.

    If you haven’t already, it’s a “must read” for an increased understand, not of capitalism, but of what capitalism has done to American culture or what is left of it.

    • Greetings, and thank you for your kind thoughts.

      As to Twilight of American Culture, I haven’t read it and am in no position to pass any judgment on it (and I note it has a huge number of mostly positive ratings and reviews on Goodreads). A quick read through the introduction and promotional literature, however, makes the book sound like a work of pessimism. I can understand feelings of helplessness given the enormity of the corporate pressures bearing down on us and the cultural problems laid out in the book most certainly need a clear enunciation. Speaking generally, and not specific to the book, we can’t afford the luxury of giving up; all will be lost if we do.

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