View from Europe…
Since mid-2009 the US has been enjoying a virtual recovery courtesy of a rigged inflation measure that understates inflation. The financial Presstitutes spoon out the government’s propaganda that prices are rising less than 2%. But anyone who purchases food, fuel, medical care or anything else knows that low inflation is no more real that Saddam Hussein’s weapons of mass destruction or Gadhafi’s alleged attacks on Libyan protesters or Iran’s nuclear weapons. Everything is a lie to serve the power-brokers.
During the Clinton administration, Republican economists pushed through a change in the way the CPI is measured in order to save money by depriving Social Security retirees of their cost-of-living adjustment. Previously, the CPI measured the change in the cost of a constant standard of living. The new measure assumes that consumers adjust to price increases by lowering their standard of living by substituting lower quality, lower priced items. If the price, for example, of New York strip steak goes up, consumers are assumed to substitute the lower quality round steak. In other words, the new measure of inflation keeps inflation down by reflecting a lowered standard of living.
Statistician John Williams (shadowstats.com), who closely follows the collecting and reporting of official US economic statistics, reports that consumer inflation, as measured by the 1990 official government methodology has been running at about 5%. If the 1980 official methodology for measuring the CPI is used, John Williams reports that the current rate of US inflation is about 9%.
The 9% figure is more consistent with people’s experience in grocery stores.
Officially the recession that began in 2007 ended in June 2009 after 18 months, making the Bush Recession the longest recession since World War II. However, John Williams says that the recession has not ended. He says that only the GDP reporting, distorted by an erroneous measurement of inflation, shows a recovery. Other, more reliable measures of economic activity, show no recovery.
Williams reports that the economy began turning down in 2006, falling lower in 2008 and 2009, and bottom-bouncing ever since. Not only is there no sign of any recovery, but “the economic downturn now is intensifying once again.” The absence of an economic recovery “is evident in the [official] reporting of nearly all major economic series. Not one of these series shows a pattern of activity that confirms the recovery [shown] in the GDP series.”
Williams concludes that “the official recovery simply is a statistical illusion created by the government’s use of understated inflation in deflating the GDP.” In other words, the reported gains in GDP are accounted for by price increases, not increases in real output.
The result of the US government’s economic deception is the same as the deception Washington has used to start wars all over the Middle East. The government propaganda produces a make-believe virtual reality that bears no relationship to real reality. In history there have been many governments who have prevailed by deceiving the people, but Washington has moved this success to a new peak. As long as Americans believe anything Washington says, they are doomed.
It is easy to see why there is no economic recovery and cannot be an economic recovery. Look at the chart below (courtesy of John Williams, shadowstats.com).
The future of the American political order is in doubt. The Bush and Obama regimes have so badly abused the Constitution and statutory law, that the America that Ronald Reagan left to us no longer exists. America is on the path to collapse or tyranny.
Suppose that a miracle produces an economic recovery. What becomes of the enormous excess bank reserves that the Federal Reserve has provided the banks?
If these bank reserves are used for expanding loans, the money supply will outstrip the production of goods and services, and inflation will rise.
If the Fed tries to take the excess reserves out of the banking system by selling bonds, interest rates will rise, thus destroying the wealth of bond holders and draining liquidity from the stock market. In other words, another depression that wipes out the remaining American wealth.
The Federal Reserve’s announcement of QE3 shows that the Fed will continue to create new money in order to protect the values of the insolvent banks’ questionable assets. The Federal Reserve represents the banksters, not the American public. Like every other American government institution, the Federal Reserve is far removed from concerns about American citizens.
In my opinion, the Federal Reserve’s purchase of bonds in order to drive down interest rates has produced a bond market bubble that is larger than the real estate and derivative bubbles. Economically, it is nonsensical for a bond to carry a negative real interest rate, especially when the government issuing the bond is running large budget deficits that it seems unable to reduce and when the central bank is monetizing the debt.
The bubble has been protected by the euro “crisis,” which possibly is more of a virtual crisis than a real one. The euro crisis has caused money to seek refuge in dollars, thus supporting the dollar’s value even while the Federal Reserve prints money with which to purchase the never-ending flow of the governments’ bonds to finance trillion dollar plus annual budget deficits–about 5 times the “Reagan deficits” that Wall Street alleged would wreck the US economy.
Indeed, the US dollar’s exchange value is itself a bubble waiting to pop. The sharp rise in the dollar price of gold and silver since 2003 indicates a flight from the US dollar. (The chart is courtesy of John Williams, shadowstats.com.)
The bond market bubble will pop if the dollar bubble pops. The Federal Reserve can sustain the bond market bubble by purchasing bonds, and there are no limits on the Federal Reserve’s ability to purchase bonds. However, the endless monetization of debt, even if the new money is stuck in the banks and does not find its way into the economy, can spook foreign holders of dollar-denominated assets.
Foreign central banks can decide that they want to hold fewer dollars and more precious metals as their reserves. Other countries, sensing the US dollar’s demise,
What if instead of taking the bait from Washington, China targets Washington’s Archilles heel–the dollar’s role as reserve currency–and decides it is cheaper to dump one trillion dollars of US Treasury debt on the bond market than to commit to a 30 year arms race? To keep the price of Treasuries from collapsing, the Federal Reserve could print the money to buy the bonds. But if China then dumps the printed one trillion dollars in the foreign exchange markets, Washington cannot print euros, British pounds, Russian rubles, Swiss francs, and other currencies in order to buy up the dollars.
Frantic, Washington would try to arrange currency swaps with foreign countries in order to acquire the foreign exchange with which to buy up the dollars that, otherwise, will drive down the dollar exchange rate and destroy the Federal Reserve’s control over interest rates.
But if the Chinese don’t want the dollars, will other countries want to swap their currencies for the abandoned US dollar?
Some of Washington’s puppet states will comply, but the wider world will rejoice in the termination of Washington’s financial hegemony and refuse the offer.
Sooner or later the dollar will collapse from Washington’s abuse of the dollar’s role as reserve currency, and the dollar will lose its “safe haven” status. US inflation will rise, and US political stability, along with America’s hegemonic power, will wane.
The rest of the world will sigh with relief. And China will have defeated the superpower without an arms race or firing a shot.
“Obama is the most popular American politician in Europe – ever. But his popularity comes in part because he has asked little of Europe and concentrated his attention on the big challenges to American power in Afghanistan and Asia. If Romney is elected, he might ask more of Europe and also clash with Europeans on Russia, the Middle East and Iran. Historians might look back at Obama’s first term as a trial separation, with Romney provoking a divorce.”
“President Romney would not be as terrifying a prospect as many Europeans think – and it’s also worth noting that there’s little prospect of a nice, cuddly Obama either. In the first 100 days Iran will loom large and Syria will continue to burn. The trick for Europe will be to show that it’s a serious partner for the US in dealing with both of these realities.”
“Obama is well liked in Europe but has shown that he can be cold towards the EU on a range of issues. In fact the Republicans may prove more cooperative towards Europe in areas like security and defence. As a European what really concerns me is any move towards the devaluation of the dollar, a currency war which has wider implications and could really hurt Europe.”
“The Middle East region has a special purchase for the more hawkish voices in the Republican camp. Both Iran and Syria are unavoidable issues, and also opportunities for Europe to show its own worth in foreign policy terms, and the EU should also look to get the ball rolling on making progress itself.”
“The big question is what would Romney really do as president? He stands for a form of remoralising US foreign policy, but what would that actually mean? Israel would be an obvious area of difference, but Syria less so. Romney’s advisors are possibly more hawkish than Obama’s, but there is also a streak of pragmatism and a strong understanding that the US electorate has no appetite for adventurism.”
“Relations with Russia will be difficult for any new US president. Obama will be bound by his ‘reset-policy’ towards Moscow despite its mixed record of success. Romney has made some tough, but not very well thought through statements about Russia. The new president will find it extremely hard to come up with policies that will change Russia’s domestic behaviour – so finding a convincing strategy to address Russia’s external behaviour will be more important than ever.”
“Whether it is Obama II or Romney I, the US seems now to be in a more introverted and perhaps even isolationist phase in its foreign policy cycle – somewhat like after Vietnam in the 1970s. But even US presidents who come into office focusing on the economy and “nation building at home” are often forced by events to engage with the world. Regardless of who wins, the key question for Europe will be how it responds to the US rebalancing towards Asia.”