- Economic policy in the United States and Europe has
failed, and people are suffering.
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- Economic policy failed for three reasons: (1) policymakers
focused on enabling offshoring corporations to move middle class jobs,
and the consumer demand, tax base, GDP, and careers associated with the
jobs, to foreign countries, such as China and India, where labor is inexpensive;
(2) policymakers permitted financial deregulation that unleashed fraud
and debt leverage on a scale previously unimaginable; (3) policymakers
responded to the resulting financial crisis by imposing austerity on the
population and running the printing press in order to bail out banks and
prevent any losses to the banks regardless of the cost to national economies
and innocent parties.
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- Jobs offshoring was made possible because the collapse
of the Soviet Union resulted in China and India opening their vast excess
supplies of labor to Western exploitation. Pressed by Wall Street for higher
profits, US corporations relocated their factories abroad. Foreign labor
working with Western capital, technology, and business know-how is just
as productive as US labor. However, the excess supplies of labor (and lower
living standards) mean that Indian and Chinese labor can be hired for less
than labor's contribution to the value of output. The difference flows
into profits, resulting in capital gains for shareholders and performance
bonuses for executives.
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- As reported by Manufacturing and Technology News (September
20, 2011) the Quarterly Census of Employment and Wages reports that in
the last 10 years, the US lost 54,621 factories, and manufacturing employment
fell by 5 million employees. Over the decade, the number of larger factories
(those employing 1,000 or more employees) declined by 40 percent. US factories
employing 500-1,000 workers declined by 44 percent; those employing between
250-500 workers declined by 37 percent, and those employing between 100-250
workers shrunk by 30 percent. <http://www.manufacturingnews.com/>http://www.manufacturingnews.com/
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- These losses are net of new start-ups. Not all the losses
are due to offshoring. Some are the result of business failures.
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- US politicians, such as Buddy Roemer, blame the collapse
of US manufacturing on Chinese competition and "unfair trade practices."
However, it is US corporations that move their factories abroad, thus replacing
domestic production with imports. Half of US imports from China consist
of the offshored production of US corporations.
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- The wage differential is substantial. According to the
Bureau of Labor Statistics, as of 2009, average hourly take-home pay for
US workers was $23.03. Social insurance expenditures add $7.90 to hourly
compensation and benefits paid by employers add $2.60 per hour for a total
labor compensation cost of $33.53.
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- In China as of 2008, total hourly labor cost was $1.36,
and India's is within a few cents of this amount. Thus, a corporation that
moves 1,000 jobs to China saves
- saves $32,000 every hour in labor cost.These savings
translate into higher stock prices and executive compensation, not in lower
prices for consumers who are left unemployed by the labor arbitrage.
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- Republican economists blame "high" US wages
for for the current high rate of unemployment. However, US wages are about
the lowest in the developed world. They are far below hourly labor cost
in Norway ($53.89), Denmark ($49.56), Belgium ($49.40), Austria ($48.04),
and Germany ($46.52). The US might have the world's largest economy, but
its hourly workers rank 14th on the list of the best paid. Americans also
have a higher unemployment rate. The "headline" rate that the
media hypes is 9.1 percent, but this rate does not include any discouraged
workers or workers forced into part-time jobs because no full-time jobs
are available.
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- The US government has another unemployment rate (U6)
that includes workers who have been too discouraged to seek a job for six
months or less. This unemployment rate is over 16 percent. Statistician
John Williams (Shadowstats.com) estimates the unemployment rate when long-term
discouraged workers (more than six months) are included. This rate is over
22 percent.
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- Most emphasis is on the lost manufacturing jobs. However,
the high speed Internet has made it possible to offshore many professional
service jobs, such as software engineering, Information Technology, research
and design. Jobs that comprised ladders of upward mobility for US college
graduates have been moved offshore, thus reducing the value to Americans
of many university degrees. Unlike former times, today an increasing number
of graduates return home to live with their parents as there are
- insufficient jobs to support their independent existence.
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- All the while, the US government allows in each year
one million legal immigrants, an unknown number of illegal immigrants,
and a large number of foreign workers on H-1B and L-1 work visas. In other
words, the policies of the US government maximize the unemployment rate
of American citizens.
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- Republican economists and politicians pretend that this
is not the case and that unemployed Americans consist of people too lazy
to work who game the welfare system. Republicans pretend that cutting unemployment
benefits and social assistance will force "lazy people who are living
off the taxpayers" to go to work.
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- To deal with the adverse impact on the economy from the
loss of jobs and consumer demand from offshoring, Federal Reserve chairman
Alan Greenspan lowered interest rates in order to create a real estate
boom. Lower interest rates pushed up real estate prices. People refinanced
their houses and spent the equity. Construction, furniture and appliance
sales boomed. But unlike previous expansions based on rising real income,
this one was based on an increase in consumer indebtedness.
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- There is a limit to how much debt can increase in relation
to income, and when this limit was reached, the bubble popped.
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- When consumer debt could rise no further, the large fraudulent
component in mortgage-backed derivatives and the unreserved swaps (AIG,
for example) threatened financial institutions with insolvency and froze
the banking system. Banks no longer trusted one another. Cash was hoarded.
Treasury Secretary Paulson, browbeat Congress into massive taxpayer loans
to financial institutions that functioned as casinos. The Paulson Bailout
(TARP) was large but insignificant compared to the $16.1 trillion (a sum
larger than US GDP or national debt) that the Federal Reserve lent to private
financial institutions in the US and Europe.
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- In making these loans, the Federal Reserve violated its
own rules. At this point, capitalism ceased to function. The financial
institutions were "too big to fail," and thus taxpayer subsidies
took the place of bankruptcy and reorganization. In a word, the US financial
system was socialized as the losses of the American financial institutions
were transferred to taxpayers.
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- European banks were swept up into the financial crisis
by their unwitting purchase of the junk financial instruments marketed
by Wall Street. The financial junk had been given investment grade rating
by the same incompetent agency that recently downgraded US Treasury bonds.
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- The Europeans had their own bailouts, often with American
money (Federal Reserve loans). All the while Europe was brewing an additional
crisis of its own. By joining the European Union and (except for the UK)
accepting a common European currency, the individual member countries lost
the services of their own central banks as creditors.
- In the US and UK the two countries' central banks can
print money with which to purchase US and UK debt. This is not possible
for member countries in the EU.
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- When financial crisis from excessive debt hit the PIIGS
(Portugal, Ireland, Italy, Greece, and Spain) their central banks could
not print euros in order to buy up their bonds, as the Federal Reserve
did with "quantitative easing." Only the European Central Bank
(ECB) can create euros, and it is prevented by charter and treaty from
printing euros in order to bail out sovereign debt.
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- In Europe, as in the US, the driver of economic policy
quickly became saving the private banks from losses on their portfolios.
A deal was struck with the socialist government of Greece, which represented
the banks and not the Greek people. The ECB would violate its charter and
together with the IMF, which would also violate its charter, would lend
enough money to the Greek government to avoid default on its sovereign
bonds to the private banks that had purchased the bonds. In return for
the ECB and IMF loans and in order to raise the money to repay them, the
Greek government had to agree to sell to private investors the national
lottery, Greece's ports and municipal water systems, a string of islands
that are a national preserve, and in addition to impose a brutal austerity
on the Greek people by lowering wages, cutting social benefits and pensions,
raising taxes, and laying off or firing government workers.
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- In other words, the Greek population is to be sacrificed
to a small handful of foreign banks in Germany, France and the Netherlands.
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- The Greek people, unlike "their" socialist
government, did not regard this as a good deal. They have been in the streets
ever since.
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- Jean-Claude Trichet, head of the ECB, said that the austerity
imposed on Greece was a first step. If Greece did not deliver on the deal,
the next step was for the EU to take over Greece's political sovereignty,
make its budget, decide its taxation, decide its expenditures and from
this process squeeze out enough from Greeks to repay the ECB and IMF for
lending Greece the money to pay the private banks.
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- In other words, Europe under the EU and Jean-Claude Trichet
is a return to the most extreme form of feudalism in which a handful of
rich are pampered at the expense of everyone else.
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- This is what economic policy in the West has become--a
tool of the wealthy used to enrich themselves by spreading poverty among
the rest of the population.
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- On September 21 the Federal Reserve announced a modified
QE 3. The Federal Reserve announced that the bank would purchase $400 billion
of long-term Treasury bonds over the next nine months in an effort to drive
long-term US interest rates even further below the rate of inflation, thus
maximizing the negative rate of return on the purchase of long-term Treasury
bonds. The Federal Reserve officials say that this will
- lower mortgage rates by a few basis points and renew
the housing market.
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- The officials say that QE 3, unlike its predecessors,
will not result in the Federal Reserve printing more dollars in order to
monetize US debt. Instead, the central bank will raise money for the bond
purchases by selling holdings of short-term debt. Apparently, the Federal
Reserve believes it can do this without raising short-term interest rates,
because back during the recent debt-ceiling-government-shutdown-crisis,
the Federal Reserve promised banks that it would keep the short-term interest
rate (essentially zero) constant for two years.
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- The Fed's new policy will do far more harm than good.
Interest rates are already negative. To make them more so will have no
positive effect. People aren't buying houses because interest rates are
too high, but because they are either unemployed or worried about their
jobs and do not see a recovering economy.
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- Already insurance companies can make no money on their
investments. Consequently, they are unable to build their reserves against
claims. Their only alternative is to raise their premiums. The cost of
a homeowner's policy will go up by more than the cost of a mortgage will
decline. The cost of health insurance will go up. The cost of car insurance
will rise. The Federal Reserve's newly announced policy will impose more
costs on the economy than it will reduce.
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- In addition, in America today savings earn nothing. Indeed,
they produce an ongoing loss as the interest rate is below the inflation
rate. The Federal Reserve has interest rates so low that only professionals
who are playing arbitrage with algorithm programmed computer models can
make money. The typical saver and investor can get nothing on bank CDs,
money market funds, municipal and government bonds. Only high risk debt,
such as Greek and Spanish bonds, pay an interest rate that is higher than
inflation.
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- For four years interest rates, when properly measured,
have been negative. Americans are getting by, maintaining living standards,
by consuming their capital. Even those with a cushion are eating their
seed corn. The path that the US economy is on means that the number of
Americans without resources to sustain them will be rising. Considering
the extraordinary political incompetence of the Democratic Party, the right-wing
of the Republican Party, which is committed to eliminating income support
programs, could find itself in power. If the right-wing Republicans implement
their program, the US will be beset with political and social instability.
As Gerald Celente says, "when people have have nothing left to lose,
they lose it."
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