The political economy of Covid-19

Governments around the world are attempting to prop up a failing capitalist system by — surprise! — throwing money at wealthy individuals and corporations, especially in the financial industry. In other words, in this time of unprecedented crisis and economic difficulty, it’s business as usual.

We were here not much more than a decade ago, although the rise in unemployment has been more dramatic than during the economic collapse of 2008. That global economic crisis was a long time coming but was inevitable for anyone willing to pay attention. During the 1990s stock-market bubble, traders repeatedly said the dramatic price rises could not last, but as long as the consensus view was that the long bull market would continue they were not going to step off the ride. When the bubble did burst, new forms of speculation kept the financial industry’s party going for several more years. Credit was the lubricant for the later round, both inflating a real estate bubble and enabling consumer spending to continue in the face of declining wages, until the speculation became unsustainable.

No more bubbles to inflate, governments representing the world’s four largest economies alone committed US$16.3 trillion in 2008 and 2009 on bailouts of the financiers who brought down the global economy and, to a far smaller extent, for economic stimulus. Those commitments included $11 trillion for the U.S. (where money thrown at capitalists far exceeded the $700 billion in the Troubled Assets Relief Program), $4 trillion for the European Union, $750 billion for Japan and $600 billion for China. Smaller economies did that too. The Reserve Bank of Australia shoveled A$1.8 billion (US$1.5 billion at the then exchange rate) at financiers to shore up its banking system. The Reserve Bank of India did the same, handing out 60 billion rupees (US$1.3 billion).

Cherry blossoms in Washington (photo by Sarah H. from USA)

All that was simply to deal with the immediate crisis of 2008. As stagnation continued, many of the world’s most prominent central banks decided to throw new gigantic sums of money at the financial industry. Specifically, through programs known by the technical name of “quantitative easing.” What that is are central banks buying in massive amounts bonds issued by their own governments, corporate bonds and/or mortgage-backed securities. For all the talk of the world’s governments taking “unprecedented” measures to deal with the dramatic economic crash triggered by the Covid-19 pandemic, most of the money being committed is in the form of new quantitative easing.

An economic song and dance

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 of the resulting distortion in 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.

By any standard, we are indeed talking about massive amounts of money. Just on “quantitative easing” alone, the Federal Reserve, European Central Bank, Bank of England and Bank of Japan spent approximately US$9.36 trillion, or, if you prefer, €8.3 trillion, in the years following the 2008 collapse. Here’s a breakdown:

  • The Federal Reserve spent $4.1 trillion in three QE programs that ended in November 2014.
  • The European Central Bank spent €2.6 trillion on its QE programs, which only concluded at the end of 2018.
  • The Bank of England spent £375 billion on its QE program.
  • The Bank of Japan has spent north of ¥200 trillion; precise figures are not available. Japan’s QE has been so large and long-lasting that the Bank of Japan now owns assets valued at more than the entire country’s economy.

Think of all the social needs that could have been fixed for such sums. For example, the British think tank Policy Exchange estimated in 2015 that 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. The U.S. 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 — all for $700 billion less than what was spent on quantitative easing.

Given this recent history — by no means an aberration in the history of these capitalist governments — it is no surprise that relief for the economic crash caused by Covid-19 has been largely directed at corporate boardrooms and the bank accounts of the wealthy.

Stimulus packages to deal with pandemic, but who gets stimulated?

The Federal Reserve, like most central banks, is “independent” of the rest of government. The reason given is to avoid “political interference,” but in reality so the elites of financial institutions can continue to do whatever they want without consequence. But as is customary, the Federal Reserve doesn’t act in a vacuum; Congress and the White House are also doing what they can to shovel gigantic sums of money at financiers and industrialists.

So far, Congress has passed two stimulus packages that were signed into law, one in late March and the second in April. A third has been passed by the House of Representatives, but the Senate has shown no inclination to take it up and there is reason to doubt House Democrats are actually serious about this last effort.

The first stimulus is the CARES (Coronavirus Aid, Relief, and Economic Security) Act, worth $2 trillion, which was signed into law on March 27. This is the act that resulted in United Statesians receiving one-time $1,200 checks from the federal government. Considering that the average monthly rent in most cities of the United States is more than that, those checks are tokens that serve to obscure where most of the money went. It wasn’t to households left without work.

The Federal Reserve (photo by Stefan Fussan)

A second stimulus bill was passed and signed into law on April 24 and is worth another $500 billion. Most of the money in this second stimulus bill was earmarked for the Paycheck Protection Program (PPP), a loan program in the CARES Act intended for small businesses that may be forgiven if firms use them to keep workers on payroll; the PPP had run out of money in two weeks. Democrats said they wanted money in this round to go to state governments struggling with suddenly shrinking tax revenue but, as is their custom, immediately capitulated when Republicans said no.

The CARES Act included $250 billion to bolster unemployment insurance, $500 billion in aid for industry and state governments, other monies going directly to specific industries and $350 billion for the PPP. Sounds nice, yes? Appearances and reality, however, diverge.

Before the second, supplemental stimulus package was passed, it had already become apparent that much of the stimulus money was going to Big Business. And that was not all, as yet more tax cuts for large corporations were included in the CARES Act. According to Democracy Now, “A congressional committee reports tax provisions in the coronavirus stimulus passed by Congress last month will overwhelmingly benefit the wealthiest Americans. Four out of five tax filers benefiting from the $70 billion temporary tax loophole are millionaires or billionaires. They’ll receive an average windfall of $1.6 million — dwarfing the $1,200 payments for working Americans.”

Manipulation of Paycheck Protection Program

Meanwhile, much of the PPP money didn’t go to mom-and-pop businesses forced to close due to the Covid-19 pandemic. At least 75 publicly traded companies received funds from the PPP, which is supposed to help small businesses. The Associated Press reports:

“The Paycheck Protection Program was supposed to infuse small businesses, which typically have less access to quick cash and credit, with $349 billion in emergency loans that could help keep workers on the job and bills paid on time. But at least 75 companies that received the aid were publicly traded, the AP found, and some had market values well over $100 million. And 25% of the companies had warned investors months ago — while the economy was humming along — that their ability to remain viable was in question. By combing through thousands of regulatory filings, the AP identified the 75 companies as recipients of a combined $300 million in low-interest, taxpayer-backed loans. Eight companies, or their subsidiaries, received the maximum $10 million possible, including a California software company that settled a Securities and Exchange Commission investigation late last year into accounting errors that overstated its revenue.”

Even the Big Business cheerleaders at the CNBC business news cable channel reported that “Hundreds of millions of dollars of Paycheck Protection Program emergency funding have been claimed by large, publicly traded companies, new research published by Morgan Stanley shows.” This report estimated that at least $243.4 million of the total $349 billion handed out in the PPP as of April 21 — by which time the PPP had already run out of money — went to publicly traded companies.

The above figures might be an underestimate; a later Washington Post report said “hundreds” of publicly traded companies have received a composite of more than $1 billion in PPP funding, although some of that money has been returned under public pressure. Eighty percent of applicants were left with nothing after funding ran out.

Published reports differ in determining the number of inappropriate recipients of PPP money because there is little accountability. One reason for that, beyond the usual wanting to shield favored donors from public scrutiny, might be that several members of Congress have themselves received PPP money. The Trump administration is refusing to provide information; it would not be a surprise to find there is something to hide there as well. Politico reports that “at least four members of Congress have reaped benefits,” and the actual total might be higher. “It’s a bipartisan group of lawmakers who have acknowledged close ties to companies that have received loans from the program — businesses that are either run by their families or employ their spouse as a senior executive,” Politico reports, naming two Democrats (Susie Lee of Nevada and Debbie Mucarsel Powell of Florida) and two Republicans (Roger Williams of Texas and Vicky Hartzler of Missouri).

Tax breaks for the one percent slipped into stimulus

One tax break inserted into the second stimulus bill only applies to companies with revenue of $25 million and another provision lets people in households earning at least $500,000 a year deduct even more of their business losses from stock market profits, The New York Times reports. These deductions will enable the recipients to reduce what they owe in capital gains taxes. Victor Fleischer, a tax law professor at the University of California, Irvine, told the Times, “Many of the tax benefits in the stimulus are ‘just shoveling money to rich people.’ ”

And given the grifters who occupy the White House, it will come as no surprise that there are special benefits for the owners of real estate. One of the goodies stuffed into the stimulus packages will allow people who own their businesses through partnerships or other similar structures to use all of the losses they claim on paper to offset taxes they might otherwise owe from other income, such as stock market profits, eliminating a cap on how much of those losses could be used. These partnerships can be very profitable, but as long as they show a loss on paper the owners can offset taxes. Jesse Drucker of The New York Times, in an interview on National Public Radio’s Fresh Air program, estimates this tax break for the wealthy will cost the government $135 billion — essentially all of which will go to the top one percent.

The Rideau Canal in Ottawa (photo by John Talbot)

This massive tax break is not specifically written for the real estate industry, but that is the industry that is likely to benefit the most as corporate real estate operations are often structured in these ways. Mr. Drucker said:

“In real estate, you can actually have, in the real world, what is quite a profitable business that generates losses on tax returns because real estate developers get to write down the value of their buildings. That turns into a deduction. And the result is that people like Jared Kushner and Donald Trump — to the degree that we have had some insight into their taxes over the last few years, we have seen that they have reported big losses on their tax returns. In many cases, it’s almost certainly the result of some of these favorable provisions that let them write down the value of their buildings. So the point is that any tax law change you make that gives people the ability to make maximum use of their losses is something that could very easily benefit real estate investors because they have so many losses. And in the case of Jared Kushner and Donald Trump, we don’t have to speculate on that. We know that in previous years, they have reported big losses, which would put them in a position to benefit from this.”

Not even the most elementary provisions to put some limits on where the money is going were inserted into these stimulus bills. For example, although there is a clause prohibiting the use of the money for stock buybacks and extra executive pay, it’s followed by another clause allowing Treasury Secretary Steve Mnuchin (the foreclosure king) to waive the prohibition. Nor are there measures to demand that corporate recipients even pay tax. Reuters reports that the PPP has given “millions of dollars in American taxpayer money to a number of firms that have avoided paying U.S. tax.” Twelve companies provided with $104 million in loans use offshore havens to cut their tax bills, seven of which paid no taxes.

Federal Reserve offers trillions of dollars

The Federal Reserve’s contribution to the wealthy goes far beyond the two stimulus bills. By the end of March, the Fed had already committed more than $3 trillion in loans and asset purchases in the wake of a rapidly collapsing economy. This included fresh commitments to a recently announced new quantitative-easing program in which the Fed had pledged to spend $700 billion to buy Treasury and mortgage-backed bonds in addition to multiple loan programs. Although most of this will come from printing money, $450 billion of this came from the $2 trillion CARES Act stimulus passed by Congress.

Following its March 23 announcement, the Fed announced another round of measures on April 9, this time committing $2.3 trillion in new loans and credits for business and local governments. The centerpiece of this round is the “Main Street Lending Program,” which makes it sound like these loans will be earmarked for small businesses, but loans will be offered to corporations with as many as 10,000 workers and revenues of up to $2.5 billion. Not exactly what we have in mind when we think of “Main Street.” The set of measures could inject $6 trillion into the financial system, but that money, if actually spent, seems mostly destined for the pockets of speculators.

With state and local governments dangerously short on revenue due to the economic crisis, and thus putting social programs in jeopardy, what does the White House want to do? The only “solution” demanded by Donald Trump is to cut the payroll tax, the source of money for Social Security. The president claims he wants a “temporary” payroll tax cut, but that has to be seen not only in light of his complete inability to say anything truthful but his and his administration’s stated desire to cut Social Security. Cutting the funding for the retirement program is a good way to undercut it, which has long been the wish of Wall Street. Even if there weren’t nefarious reasons at work, would a temporary payroll tax cut provide a jolt to the economy? Definitely no, says the Center on Budget and Policy Priorities in a May 12 commentary.

“President Trump has said he will not support any additional relief or stimulus measures in response to the human and economic crisis caused by the Covid-19 pandemic unless they include a temporary payroll tax cut,” the Center said. Stimulus packages are only effective “if they quickly deliver resources to people and businesses that most need it and so are most likely to spend rather than save any extra dollars they receive.” But the Trump plan would fail to help either. The Center said:

“Cutting the employee share of payroll taxes gives the most help (in dollar terms) to higher earners, who are less likely to need the help or to spend most or all of the extra money. Compounding the weaknesses of this approach, it does less for those with lower earnings and nothing at all for people who have lost jobs. And cutting employer payroll taxes is an ineffective way to shore up business hiring and investment. Business’ main problem now is lack of customers for their products — both because of social distancing measures and because many customers’ incomes have fallen dramatically as unemployment has risen. Businesses will not hire (or retain) more workers or invest in more equipment than they need to produce the goods and services they can actually sell.”

Already there are signs that the windfall large businesses have received from the Trump administration have been slipped into bank accounts, not into investment. Economist Jack Rasmus has calculated that the loss of income for the tens of millions of United Statesians plunged into unemployment has cost them a composite $1.3 billion in lost wages. Ridiculing the orthodox economic “theory” that the problem with recessions are “sticky wages” — in other words, wages don’t fall fast enough or far enough during downturns — Professor Rasmus notes that businesses are not investing in the wake of the wage reductions. He writes:

“They’re hoarding the $1.74 trillion in Congressional loans and grants bailouts. And hoarding the $650 billion in business tax cuts also in the bailout legislation thus far (which one hears very little about in the media, I might add). … [T]he short term cash deposits by business in just institutional money funds (only one source) has risen from $2.3 trillion before March 1, 2020 to $3.3T today. That’s a $1T rise in cash deposits by businesses, just in institutional money funds. More is being deposited in commercial banks. The long run average of business deposits in commercial banks has been around 5% (6% under Obama and 4.6% under Trump 2016-19) to 15.8% since March 1. Businesses and investors are hoarding their cash and stuffing it in their short term accounts in banks, funds, and who knows where else, on and offshore.”

Much of that hoard of cash is likely destined for stock buybacks, dividends, speculation, buying companies and boosting lobbying efforts down the road. U.S. corporations spent more than $1.1 trillion on buying back stock in 2018 and although the pace slacked a bit in 2019, more than $700 billion went toward buybacks. Stock buybacks are completely unproductive spending — they are simply corporations buying their own stock, giving those who sell a premium to the trading price and boosting profits for remaining shareholders because the profits will be shared among fewer people. Speculators love them.

Britain, EU and Canada: Lots for financiers, crumbs for working people

Capitalism is a global system, and thus using a crisis to benefit the wealthy and powerful is hardly limited to the United States, even if it is the center of the global capitalist system and thus at the forefront of propping up its winners. Tax Watch UK, which describes itself as an “investigative think tank,” discovered that among the recipients of loans under the Bank of England’s Covid Corporate Financing Facility are 13 companies with links to tax havens or that “have seen controversy regarding their financial affairs.” Those 13 companies received £4.8 billion, or almost 30 percent of the total. Tax Watch UK reports that among these is Baker Hughes, a subsidiary of General Electric, “which is embroiled in a £1 billion tax dispute over unpaid taxes going back to 2004.”

The British government, headed by the mendacious Boris Johnson, hasn’t been shy about handing out money to business. The Bank of England has committed £200 billion to quantitative easing (bond buying), £330 billion in loan guarantees for business and an unspecified amount for “short-term liquidity” for the government, among other measures. Separately, Whitehall has committed tens of billions of pounds to three separate loan programs, property tax holidays, direct grants for small firms, grants for “innovation” and other items. For working people? A total of £14.7 billion of additional funding to the National Health Service and £7 billion for increased payments under the Universal Credit scheme and other benefits. Overall, quite one-sided toward capital.

City of London expanding (Photo by Will Fox)

Similar to the United States and United Kingdom, the bulk of money committed by the European Union to shore up the economy during the Covid-19 pandemic is for quantitative easing. The EU has committed to pouring €1.35 trillion into buying private- and public-sector securities by June 2021 under its Pandemic Emergency Purchase Program.

The EU will also offer a €540 billion addition to its European Stability Mechanism, an International Monetary Fund-style loan program under which money is loaned to governments under condition that recipients implement severe austerity. (This is the program under which the EU paid off the Greek government’s debt to European banks, meaning that Greece instead owed its debts to EU institutions rather than the banks, doing nothing to lower the debt level but forcing Athens to administer punishing austerity that left Greeks destitute.) And on top of the above, the EU has thrown in another €200 billion for businesses. For working people, nothing more than relative crumbs: €37 billion “to support public investment for hospitals, [small businesses], labor markets, and stressed regions” and €100 billion to protect workers and jobs. Once again, quite one-sided in favor of capital.

Back across the Atlantic, Canada has announced multiple programs, including quantitative easing. The Bank of Canada has implemented several QE programs for buying corporate bonds, federal and provincial government bonds, mortgage bonds and commercial paper (short-term debt issued by corporations), as well as programs to provide credit and “support the stability of the Canadian financial system.” The Bank of Canada is not forthcoming about the total cost of these programs; it has committed to spending C$5.5 billion per week, with no cutoff date, on just two programs, the purchases of federal government bonds and mortgage bonds. A measure of what has been spent so far is indicated in the central bank’s balance sheet, which reveals that total assets held by it increased from $120 billion on March 11 to $498 billion on June 11. So that’s $378 billion with more to come.

What is Canada spending on working people? $116 billion for “direct aid to households and firms” and $4 billion for the health system. So a lot less, and even some of this much smaller amount will be going to businesses.

Although more direct aid for working people is being included this time around — given the crisis of neoliberalism and that the massive subsidies to the same financiers responsible for the crash of the economy in 2008 haven’t been forgotten, political leaders had no choice but to sweeten the pot a little — the overwhelming majority of the money dispensed is going to the financial industry and to large corporations. Again it must be asked: How much more useful would it have been to use this money for practical needs and direct payments to people instead of propping up a bloated and wasteful financial system? More directly, how long can the peoples of the world continue to believe that a system in crisis so frequently and requires such massive bailouts works?

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.

We have no money so central banks give more money to banks

It’s unanimous! The European Central Bank confirms that the only possible solution to falling wages and depressed spending is to throw more money at the banks and inflate another stock-market bubble.

The ECB thus joins the world’s other most important central banks in the hope that “quantitative easing” — a form of “trickle-down” economics — will somehow work despite having never achieved anything other than the inflation of asset bubbles, a benefit primarily to the one percent. Then again, perhaps that might explain it.

Mario Draghi, the president of the ECB, last week committed €1.1 trillion to buying eurozone government bonds and, to a lesser degree, asset-backed securities and pools of mortgage loans known as “covered bonds.” Starting in March, the ECB will buy €60 billion of assets a month, with a commitment to continue this program until September 2016. The ECB’s stated goal is to boost inflation and prevent deflation, while also driving down the value of the euro.

The European Central Bank joins the Federal Reserve, the Bank of England and the Bank of Japan in flooding the financial system with money, and joins all those central banks and the Swiss National Bank in attempting to drive down the value of its currency. One problem is that all currencies can’t decline against one another, any more than all countries can simultaneously produce trade surpluses. At the moment, it is the euro that is declining in value, which theoretically will give a boost to exports from eurozone countries, but as eurozone countries conduct most of their trade with one another, the boost from a weakened euro will not necessary be significant.

Blockupy 2013: Securing the European Central Bank (photo by Blogotron)

Blockupy 2013: Securing the European Central Bank (photo by Blogotron)

But with declining wages, fewer people have enough to spend, and the super-wealthy already have more money than they can possibly use for productive investment. Nonetheless, the “market” has decreed that more austerity for working people and more speculation by the one percent is the magic elixir that will finally fix the economy.

Fix it for whom? Let’s start to answer that question by noting the supposed purpose of quantitative-easing programs: to stimulate the economy by encouraging investment. Under this theory, a reduction in long-term interests 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.

Trillions for asset buying sprees

We are not talking about small change here. In three rounds of quantitative easing, the Federal Reserve spent about $4.1 trillion. The Bank of England has spent £375 billion. The Bank of Japan, after boosting its QE program last October, will now spend ¥80 trillion (about US$680 billion) per year. This after 18 months of quantitative easing failed to revive the economy, as with an earlier QE program that ran from 2001 to 2006. In just the past 18 months, the Bank of Japan’s QE spending was ¥75 trillion ($640 billion).

Imagine what could have been done with these enormous sums of money had they been used for directly creating jobs, or simply by giving it directly to working people, who would have gone out and spent it. Or by putting the money to productive use, such as rebuilding crumbling infrastructure.

Instead, what is planned is more austerity — that is, more punishment. The other component of the European Central Bank’s January 22 announcement is that favorite term, “structural adjustment.” A euphemism used by the World Bank and International Monetary Fund when ordering an end to job security and social safety nets as a condition for granting loans to developing countries, this is now being applied to the global North. Near the end of his remarks announcing the quantitative easing, ECB President Draghi said:

“[I]n order to increase investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms needs to gain momentum in several countries. It is crucial that structural reforms be implemented swiftly, credibly and effectively as this will not only increase the future sustainable growth of the euro area, but will also raise expectations of higher incomes and encourage firms to increase investment today and bring forward the economic recovery.”

Labor “reforms” are necessary to “improve the business environment.” In plain language, that means more austerity in an effort to boost corporate profits. In the question-and-answer session after the announcement, President Draghi gave revealing answers to two different questions: “For investment you need confidence, and for confidence you need structural reforms” and “it would be a big mistake if countries were to consider that the presence of this programme might be an incentive to fiscal expansion. … This programme should increase the lending capacity of the banks.”

Firing workers and pushing wages lower will make capitalists feel better? Perhaps, but if there isn’t demand for their products, they still aren’t going to invest.

If consumers have no money, they aren’t buying

The ECB wishes to believe that further reducing job security and social safety nets will provide capitalists with the magic “confidence” that will prompt them to invest. But there is already plenty of industrial capacity sitting idle — E.U. manufacturing capacity utilization is only 80 percent while the E.U.-wide unemployment rate is 10 percent. The youth unemployment rate is 21.9 percent. More austerity isn’t going to reverse these effects of austerity.

The Bank of Japan boosted its quantitative easing program in October 2014 because it had not pulled the Japanese economy out of stagnation. Gross domestic product contracted in the second and third quarters of 2014. (Fourth-quarter statistics have yet to be reported.) Japanese wages have declined in the past year while profits have increased. Household spending in Japan had fallen for six consecutive months at the time of the Bank of Japan’s announcement, in part due to an increase in sales tax pushed through by Prime Minister Shinzo Abe.

The Federal Reserve’s quantitative easing has served to prop up a stock market that continues to rise despite ongoing stagnation. The standard measure of stock market valuation, the price/earnings ratio, remains high by historical standards. (This ratio is a company’s market value per share divided by earnings per share, or to put it another way, how many dollars a buyer pays for one dollar of profit.) The composite P/E ratio for the broadest measure of U.S. stocks, the S&P 500 Index, is 19.7. The rare times in history that ratio has risen above 20 has been followed by a crash.

Japan’s stock market has also risen during its quantitative easing; its benchmark Nikkei 225 Index has doubled since November 2012.

Trillions of dollars has been poured into programs that do little more than produce stock-market bubbles; more trillions have been poured directly into banks and other financial institutions for bailouts. The European Central Bank says more of the same, and European workers will continue to pay for it. The markets demand this, it is said. Capitalist markets, however, are nothing more than the aggregate interests of the largest industrialists and financiers — when we let “markets” make social decisions, that really means a dictatorship of big business and big banks. And supporting those banks is very expensive.

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”?