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Commentary :: International
Free Trade Agreement: Special Rights for Corporations
10 Jul 2014
The TTIP (Transatlantic Trade and Investment Partnership) now secretly negotiated gives corporations the right to sue sovereign states for lost profits and endangers public sector jobs and social and environmental protections.

Special Rights for Corporations

By Southwest German Radio

[This radio transcript from 6/11/2014 is translated from the German on the Internet,]

The planned free trade agreement between the US and the EU earmarks arbitration courts that make final decisions for disputes between businesses and state boards. Suits in the billions imperil Germany. An American firm sues the Federal Republic of Germany for compensation because a chemical plant cannot be built… Baden-Wurttemberg gives way out of worry of a lawsuit in the billions. Monsanto may grow genetic corn in the country… US corporations could sue the German state for billions of the money of taxpayers. That could soon be reality. There are already other cases now.

Like Krummel near Hamburg, the Brunsbuttel nuclear power plant in Schleswig-Holstein was shut down after the reactor accident in Fukushima. The German nuclear exit was resolved by the government and the parliament and supported by the large majority of Germans. Nevertheless the Swedish firm Vattenfall, operator of the plants, sues Germany for compensation (3.7 billion Euros) before a secret international court of arbitration, not a regular German court. Three private economic lawyers make legally binding decisions while the public is excluded.

“They open up a parallel course of law for a corporation to which only they have access. The legal system that we have has nothing to do with the rule of law principles that are known and esteemed like independence of the administration of justice.” Pia Eberhardt, trade expert (CEO). This is because companies like Vattenfall enjoy special rights. The foundation is a so-called investor-protection agreement.

Germany has concluded over 130 such agreements. Originally businesses were protected from arbitrary expropriations as in countries without a functioning constitutional state or dictatorships. However not much is left of that, says Pia Eberhardt of the critical lobby organization CEO.

“The system has actually changed very much. Complaints today do not generally focus on direct expropriation on the taking away of a factor or land, discrimination against foreign investors. Today democratic laws to protect the public interest are attacked. In other words, language and democracy are completely mutated or turned upside down.”

So the cigarette giant Philip Morris sues Australia to prevent the planned warnings on cigarette packages. A US energy firm demands compensation of a billion Euros from France because its drilling license for natural gas was cancelled. Deutsche Bank sues Spain because the country cut solar subsidies. The bank speculated in new plants. All this happens before courts of arbitration that work completely non-transparently, experts criticize.

“We have problems with transparency. No rule says investor-state arbitral proceedings must take place publically. While some occur publically, most do not. There is no basic rule on publication of arbitral awards.” Prof. Steffan Hindelang, constitutional lawyer, Free University of Berlin. The number of these non-transparent procedures increases. In 1995 there were only three such procedures in the billions worldwide. In 2013 there were 568 procedures. American companies suing states were prominent.

Until now these companies could not sue Germany before a court of arbitration. This could change through the planned free trade agreement between the US and the EU with comprehensive investor protection rights for American companies.

An example from Lower Saxony shows what this could mean concretely.

The American energy giant ExxonMobil drills here for natural gas and uses the controversial fracking. With fracking, rock is burst open with the help of water and chemicals to gain natural gas. The method is regarded as very dangerous; the groundwater can be contaminated through the chemicals. This is already happening in the US and triggers massive resistance.

“That we want to protect our water is most important. 340,000 people are affected here… Exxon and the other gas producers want to squeeze the last gas from the earth through fracking.” Hartmut Horn, Botersen citizen initiative “Frackless gas drilling in Rotenburg district.”

Their protest could be very expensive for taxpayers through the planned investor protection since ExxonMobil has a drillingt license. If the state sets strict drinking water conditions or prohibits fracking, Exxon could sue for damages in the future in a court of arbitration.

“I can argue as an investor I was not treated fairly and justly. My legitimate expectation that I could frack to all eternity was disappointed. A court of arbitration could understand that argument and then say here is a billion Euros compensation that a license was taken away from you for example.” Pia Eberhardt, trade expert/ Corporate Europe Observatory (CEO)


Just the fear of suits in the billions could influence German politics to renounce on new environmental- and consumer conditions.

“The higher the compensation demands, the more a state is obviously inclined to reflect about corresponding legal measures again.” Prof. Steffan Hindeland, law professor at the Free University of Berlin

Remember, investor-protection was originally intent on protecting businesses in developing countries and dictatorships, not for functioning legal states like the US and Germany.

“We do not need any parallel structures when national courts can make decisions according to neutral and unbiased objective criteria.” Prof. Steffan Hindelang, law professor, Free University of Berlin. Thus investor-protection and backroom deals as in the free trade agreement are undemocratic and unnecessary.


Senators on republican and democratic sides are now working on a deal so US super-companies can bring back money bunkered abroad to their home cheaply. Apple chief Tim Cook did his utmost for that.

A large part of Apple’s $150 billion in cash resources is stored abroad. The 35 percent business tax would arise if the company returned the sum to its home, the US. The amou9nt would not be so high after an alliance of several democratic and republican senators. One republican tax lobbyist said a revival of the 5.25 percent paid during a similar tax holiday in 2004 is possible. (source: heise newsticker)


By George Restle

[This short facebook blog and comments published on 5/15/2014 are translated from the German on the Internet,]

In Europe there will be elections next week (May 26)… Facts are created across the Atlantic. Next week the EU commission will be negotiating the free trade agreement with the US. The fifth round of secret negotiations will occur in the provincial town Arlington. Much is at stake: telecommunications and protection of the atmosphere, work, energy and copyright law. The agreement involves investments and regulation questions, the public employment system and trade with goods and services. Whoever looks at next week’s agenda could ask: what is not at stake? That is the point. The mandate for the negotiations is boundless. Whatever is not explicitly excluded can be treated – and in case of doubt regulated.

Several things come to us through the backdoor of the TTIP. Principles are involved and not only chlorinated chicken and hormone beef, the privatization of whole sectors of public services. Central institutions of our society threaten to become playthings of the open market: universities, hospitals, savings banks and local public transportation. Even the basic values of democracy do not seem secure any more: constitutional state and transparency, citizen participation and parliamentary oversight. Everything becomes reduced to only trade barriers in the intellectual world of free trade ideologues. The gibberish or jargon of the new transparency offensive cannot be trusted. Even if investment protection were suspended, the controversial arbitration courts will still come. Nothing seems safe anymore before the clique of the big corporations. The free trade agreement is an attack on our democracy and is more than an attack on environmental- and social standards. That should be clear to everyone.


Muchacho Smith: The Transatlantic Free Trade agreement (TTIP) is a coup de-etat in slow motion!

Mecki Drees: What has now become of democracy? I feel like I’m in the 52nd state of the US.

Michael Mechtold: Unrest will begin in one country and trigger an extensive Europe-wide fire. After the elections, Brussels will show its true grotesque face. This will not be pleasant for us. I am very worried.

Uwe Meier: “Everything comes into question EXCEPT rightwing parties!”

Domingos Celsio Patricio: I recommend voting for the Left party (Die Linke) in Germany.

Dagmar Gawronski: Facts are created and forced on citizens. Is that democracy?

Andarle Sodarle: The EU now has the possibility of being made a slave after being made a prostitute. It will not be able to escape this. The US goes down and obviously would like to take along as many as possible.

Karin Kauzlaric: A swarm of overpaid twits sit in the EU. Recipients of orders from the US. Ms. Merkel and Mr. Steinmeier are the model students of the US.

Marsu Polami: TISA is at least as bad as the free trade agreement TTIP.

Hubert Hoffmann: We CITIZENS are raped and incapacitated by POLITICS. Time for street fighting!

Michel Goedecke: The main point is people vote for this black plague. They want to be Christians!

Axel Weber: TTIP is a dangerous brazen attack on our social-democratic basic values… Americans want to bomb us back into the proverbial pre-industrial slavery. Look at their totally ruined country!

Lutz Romahn: Momentous decisions are made over the heads of the affected! What does this have to do with democracy?

Karin Johnson: The big conglomerates are determined to get everything… Society pays for this, not only with its taxes.

Andrea Klinkhart: Yesterday Ann Will spoke about an agreement with Canada that serves as a model. That should be thematicized.

Angela Heumann: None of the EU oligarchs wanted to admit what was resolved long ago and was actually negotiated. Oligarchs act that way!

Gabriele Dominiak: Monsanto sends its regards! If this happens… then good night!!

Erik Schuler:What is the TISA?

Andy van den Unartigen: This is not secret any more. Citizens do not want this and yet it will come to them. Excuse me, I forgot, when are the citizens interested?

Andrea V. Earthling: Thanks Monitor for not being intimidated from reporting the truth!

Bernhard Wessling: We must leave the EU!!!! Europe can function without these lobbyists!

Rudolf Kapp: These Americans are smashing the whole world!

George Parker: When will the nations get the message about what is wrong? I recommend the book by Naomi Klein: Shock Therapy. Everything is there.

Marcel Fuhr: There will be worry and foreboding!

Sylvia Koepen: The usurpation is fully underway.

Michael Lips: We cannot prevent it as citizens because it is all the same shit to the masses. Political weariness is the decreed state education program!

Michael Fritz: I vote for one of the small parties. This is “only” to express my displeasure… I do not want established politics any more… No vote is in vain.

Ulrich Hohmann: On May 26 we could all vote for a party that opposed the TTIP! We cannot set a clearer sign!

Elke Windemuth: This makes me infinitely furious. When is there a demonstration against this? My rage must go somewhere.

Thomas Samoht: I am an ardent European. Therefore I am against the EU in Brussels!

Michael Gunther: We all have responsibility that our incompetent highhanded politicians driven past the people by lobbyists do not suspend our democratic values. Some time after the EU election, Merkel and her failure will sell us out again since there is allegedly no alternative. Let us all say STOP!

Michael Greten: If the agreements had not been leaked out, we would not even know what Merkel and Obomba wanted to negotiate very secretly… without parliament and without the people – democracy a la Western!!!

Fritz Wert: Democracy worldwide is in retreat.

Martin Grasser: We have the problem today that our politics does not resist international corporations. We need an institution like the UN to say a little word. Social misuse occurs regularly when subsidies are cancelled and shortly thereafter relief works are closed.

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Russia surpasses US gold production for first time in 25 years
10 Jul 2014
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Russia has produced more gold than the United States for the first time in 25 years. It’s now the world’s third biggest producer after China and Australia, Minister of Natural Resources and Environment of Russia Sergey Donskoy said.

In the last five years 270 mineral deposits were found in Russia, despite it not being a leading country for mineral exploration investment.

"This, in our opinion, has negative consequences, including a negative impact on the social and economic development of the regions," quotes Donskoy as saying.

In 2013 Russia increased gold production by 12.6 percent achieving 254,241 tons according to the Russian gold producers union. China, the world’s major gold producer, increased its gold production by 6.2 percent to 428.16 tons a year.

However in 2013 gold prices tumbled by 28 percent and have only slightly recovered this year from $1,217 to $1,328 per troy ounce.

Unlike other countries where the taxation of oil and gas production is based on revenue, Russian legislation also includes the expense of geological exploration.

A deduction of exploration expenses from the production tax will contribute to the development of Russian gold production, says the minister, explaining that the US already has similar legislation for its coal industry.
Implications of China as Number One
11 Jul 2014
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A friend writes:

A few notes on the implications of China displacing the United States as the world’s number one country over the course of the 21st Century:

1. The Chinese business cycle will become the world’s business cycle (replacing the U.S.). It will be a huge shock the first time a recession hits the U.S. because China goes into a downturn. How might this work? A recession in China slashes Chinese demand for imports. Some of those imports are from the U.S. Others are from other countries, that in turn buy less from the U.S.

However, all of this is a bit indirect. The more likely (and powerful) mechanism is that a financial panic starts in China and spreads. There is plenty of history showing that financial panics typically don’t stop at national borders. The East Asian crash of 1997 was one example. The Great Recession was/is another. By contrast, the Argentine Great Depression of 2001-2003 was mostly limited to Argentina (Argentina is not a global economic power). Note that even in the 19th century, economic crises swiftly spread around the world.

2. China’s incessant demand for commodities drives global commodity prices up, and China’s exports drive the prices for manufactured goods down. Of course, this is already happening. Given that the U.S. is a net importer of commodities (by far) and an exporter of manufactured goods this is bad for U.S. terms of trade. Basically, China is a direct competitor to the U.S. in world trade and China’s growth tends to impoverish the U.S. Note that many economists already believe that the gains from cheap imports from China, have been more than offset by China’s impact on commodity prices (food and fuel).

Tangentially, does it seem like restaurant prices are going through the roof? A Cobb or chef salad at a diner now seems to start at $13.95. And how much am I supposed to be tipping these days?

3. At some point, China may become a political model for countries around the world. Given that China is a one-party state with a mixed economy, this will pain all sorts of folks on the left (and the right). Basically, the western political and economic model will lose credibility in favor of China’s. Of course, this is already happening. Notably, the ability of the West to influence the third-world, has substantially declined because of the willingness of China to provide political and economic support without the strings demanded by Europe and the U.S.A.

An NYT op-ed writer is already denouncing India’s new prime minister Modi for showing an interest in how things are done in China.

4. China may emerge as a dominant military power. History says that military power cannot be separated from real economic power. The dominant military power of each modern period has been the dominant manufacturing power. That meant the UK until around 1900 and the U.S. until around 2000. China is the leading manufacturing power of the world today. The gap separating China and the U.S. will only grow (much) larger over time. Manufacturing is crucial for war for two reasons. First, manufacturing provides the national wealth required to pay for war. Second, manufacturing (the manufacturing infrastructure) provides the means for actually producing the weapons needed for war. Note that services are not a substitute for manufacturing in this context. Services are not (typically) tradable and don’t provide the convertible currency income needed to fight international wars.

More specifically, the U.S. may end up fighting an aircraft carrier war with China at some point in the future. History suggests that the U.S. Navy could lose just quickly as Britain did in WWII. On December 10th, 1941 the Japanese sunk the Prince of Wales and Repulse in just a few hours ending British naval power in the Pacific. Conversely, the U.S. ended Japanese naval power with the destruction of Kito Budai (the main Japanese fleet) in the Battle of Midway. Like it or not, America’s carrier fleet could be destroyed just as quickly and just as decisively [and without nuclear weapons]. In one day (less), both the reality and perception of American global power could essentially evaporate.

5. China may become a dominant setter of technology standards. After all, if China is the dominant producer and consumer of some technology, why wouldn’t China’s standard(s) become the world standard(s). Of course, the dissemination of technology standards is never that simple. The rest of the world is metric, but that hasn’t driven metrification in the U.S. Conversely, the U.S. uses 120 volts, 60 cycle power. Most of the rest of the world does not. Even when the U.S. electric utility business dwarfed any other country, the ROW (Rest Of World) didn’t rush to embrace U.S. standards (120 volts is too low, 60 cycle is correct). All that having been said, China may become influential with respect to new technology standards even if the old ones don’t change much.

6. China may become a dominant source of technology innovations. That hasn’t happened so far. Only a handful of new technologies can be said to have been “invented in China”. However, this is to be expected. The early years of U.S. economic growth were mostly imitative. Indeed, the U.S. was notorious for violating foreign copyrights and patents and refusing to pay for the privilege (Dickens hated the U.S. for years). Japan was widely derided for years (decades) as a producer of cheap copies of American goods. When that stopped being the most profitable model for Japanese firms, they (Japanese manufacturers) invested heavily and successfully in innovative products and moved upscale. The same process can be observed in South Korea and Taiwan now. China will inevitably follow.

The notion that America has some inevitable advantage in “creativity” is popular, but I have a hard time even defining “creativity,” so I don’t put all that much faith in this theory of American dominance.

7. China will almost certainly become the dominant financial power in the world. China is already the world’s largest creditor and holder of foreign exchange reserves ($3.95 trillion). The U.S. is the world’s largest debtor. It’s obvious that creditors gain power and debtors decline. Sadly, the “supply-side” right is so obsessed with tax cuts for the rich and “free trade” (unlimited outsourcing) that they deny what’s self-evident to everyone else. Of course, the welfare-state left is just as unwilling to admit that debt and deficits aren’t free and hobble a nation over time.

8. More subtly, the Chinese language and culture may gain influence worldwide. At some point, Chinese authors, playwrights, movie producers, musicians, and artists may become highly influential globally. Chinese may become the mandatory second language for everyone (as English is now). In my view, the Chinese language is likely to gain global market share (for economic reasons) considerably faster than Chinese artists and musicians.

“Mandarin immersion” grade schools are popular among SWPLs since they act as NAM Repellents, but I haven’t seen much evidence that white people are actually learning to speak Chinese. For example, in 2013, only 520 high school students in America who say they didn’t grow up speaking Chinese got a 5 on the Chinese Language and Culture Advanced Placement test, which is higher than I would have thought, but still not much.

It remains to be seen if China can produce books, movies, songs, etc. that the rest of the world yearns for. Conversely, their no doubt at all about China’s ability to produce globally competitive goods.

A decade ago it looked like the Chinese would become competitive in movies. Zhang Yimou’s film “Hero” was spectacular, but the Chinese film industry hasn’t made much of an impression since.

Lately, Hollywood blockbusters have routinely included a segment filmed in China (with perhaps a shout-out to Russia in the plot), because China and Russia are developing American-style movie-going cultures where youths go to opening weekend movies. For example, Transformers: Age of Extinction opened this weekend with $100 million in America and $92 million in China (with $22 million in Russia). (Here’s my 2011 review of the previous Transformers movie.)

So, Hollywood’s strategy is simply to assimilate China into the Blockbuster Borg. So far, it seems like it’s working to head off the Chinese threat.

The American college admissions system is an important leverage point. The Chinese crave the status of American university degrees, which allows Americans to encourage the Chinese to learn to jump through the various SWPLifying hoops they choose to erect. Or they can just accept the Chinese money and test scores, no questions asked.
Re: Free Trade Agreement: Special Rights for Corporations
11 Jul 2014
But (In)action Speaks Louder Than Words

Federal Reserve Talks Jobs


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.

“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 announced 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.

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.

Pete Dolack writes the Systemic Disorder blog. He has been an activist with several groups.
Trade Agreement
12 Jul 2014
Hercules Gets a Task

Defending Fed Policy


The last thirty-five or so years have seen one of the purest experiments in ‘market’ economics possible. Since the waning days of the (Jimmy) Carter administration the West has seen an ascendance of finance capitalism that has increased in ideological purity as its institutions have been systematically embedded into modern political economy. This isn’t to suggest that the ‘market’ in market economics is more than ideological cover for a patronage system for connected insiders. But it is to challenge the perpetual storyline of capitalist heroics, of the brave Central Bankers who bucked the system to fight the good fight for the ‘little man.’ Remember when demonstrated serial economic catastrophe generators Alan Greenspan, Robert Rubin and Larry Summers were ‘the committee to save the world?’ How about when the group of cadaverous white guys lost a few nights’ sleep ‘saving’ Wall Street from certain calamity in 2008? Now it turns out that none other than former Fed Chair Ben Bernanke is a working class hero, champion of we ‘little people’ against whom the reigning plutocracy has aligned its ‘hard money’ intents. Who would have thought it?

The back-story here at first glance appears an economic snore-fest over ‘inflation.’ The reason why it may be a tad more interesting lies in the utter irreconcilability of competing view of banks and money. So here’s a puzzle for those who like puzzles: how can the price of ‘everything’ rise while inflation, defined by economists as a rise in the price of ‘everything,’ doesn’t budge? Here’s another: if the cost of borrowing is reduced but the price of what is bought with the borrowed money has been pushed higher are corporations and people being encouraged to buy things or not? And one more: if corporate executives use lower interest rates to load ‘their’ companies up with debt to enrich themselves (to raise the value of the stock they’ve granted themselves) is ‘the economy’ made better off or worse? We’re getting close now: if the tiny group of people who own ‘everything’ is made fabulously wealthy through monetary policy while most people see no benefit or are economically diminished by it is this policy a success or failure? Finally, if central bankers themselves claim that banks ‘create’ money by making loans— that ‘savings’ have little if anything to do with it, why would allegedly informed economists continue to insist that a ‘savings glut’ is behind asset price inflation?


Graph (1) above: the stock market is a proxy for the broader ‘financialized’ economy that includes commercial, and increasingly residential, real estate, ‘art,’ and anything else that can serve as speculative object and store of economic value. Mainstream economists tend to consider only ‘real’ inflation, a rise in the price of a broad ‘basket of goods and services,’ because financial assets are a form of quasi-money, claims that have not yet been realized in ‘real’ demand. However, as the rise in commercial and residential real estate prices coincident with Fed policy suggests, the line between ‘real’ and financial assets becomes less clear as ‘the economy’ becomes increasingly financialized. Also, the ‘fundamental’ basis of financial asset prices, corporate earnings, has risen far less than stock prices. The (Robert) Shiller CAPE (cyclically-adjusted prices earnings) ratio has risen from 15 to 25 since 2009. Source: St. Louis Fed.

The inspiration for this cavalcade of questions is the liberal response to a New York Times piece by Neil Irwin (top link above) about the extraordinary rise in global asset prices since 2009. The core thesis of the piece, that the monetary policies undertaken by Western Central Banks have caused the rise, is itself unremarkable. What is remarkable, even inspiring in a dismal sort of way, is the insistence that rising asset prices benefit ‘the economy’ in a broad sense when the only conclusive evidence is that it benefits the tiny minority that own the assets whose values are being pushed higher. The claim (link above) is that plutocrats favor low inflation because it preserves the purchasing power of the debt that they have invested in. Here’s the rub: since the Federal Reserve began QE (quantitative easing) in 2009 U.S. stocks have nearly tripled in value. Conversely, a two percent rise in interest rates to dampen ‘inflation’ on a bond portfolio with maturity of about ten years (duration = 7) would result in roughly a fourteen percent loss. So, a 300% gain in stocks versus a fourteen percent loss in bonds— do we think plutocrats care more about rising interest rates or rising stock prices? (They are related, but that is a different story). The people who do care about protecting the purchasing power of the loans that they’ve made from inflation are bankers. Did I mention that Central Bankers are bankers who work for banks and bankers?


Graph (2) above: the question of precisely who the plutocrats in question are is partially answered by looking at who ‘owns’ financial assets? Corporate executives use captive Boards of Directors to award themselves lavish stock options that rise in value as the broad stock market rises. They then load ‘their’ companies up with debt in order to buy back company stock. Buying back company stock in turn boosts the value of the stock options that they have awarded themselves (more below on this). The effect of this in terms of executive compensation can be seen in Graph (2) above. Wall Street, and banks and bankers more generally, benefits from rising asset values both directly from the increase in the value of the assets they hold and indirectly through underwriting fees and lending against the assets held by others. Source: Forbes.

The question of what Fed policy actually accomplishes remains more contentious than makes sense unless obfuscation is part of the goal. Former Fed Chair Ben Bernanke claimed that QE (quantitative easing) raises the value of financial assets and lowers interest rates through the ‘portfolio balance channel.’ The Bank of England confirms Mr. Bernanke’s account. Regardless, depending on the degree of financialization in an economy lowering interest rates by itself raises asset prices by reducing the cost of financial leverage and it raises corporate profits by lowering borrowing costs. Additionally, by reducing the price of borrowing corporations and people are encouraged to borrow more. Given that excessive private debt was a key contributor to financial and economic calamity in 2008 encouraging more debt, as the Fed has done, seems the opposite of enlightened public policy. But the banks like it because it means more business for them. And given that the combination of cheap debt and inflated asset prices can inspire either capital investment or insider looting by corporate executives and the payoff to capital investment is uncertain but the payoff to looting is relatively well defined, Fed policy once again appears the perfect inspiration for corporate looting. The precise mechanics of this corporate looting are explained here and below.


Graph (3) above: excessive private debt has been widely cited as a root cause of the Great Recession, even by economists who support the Fed policy of encouraging more private debt. While the level of mortgage debt is lower than it was in 2008, this is in fair measure due to the combination of banks writing off un-recoverable loans and people making mortgage payments on underwater mortgages for the last six years— a real drag on the economy. The rise in corporate debt barely took a breather in 2008 and combined (non-financial) private debt is higher now than it was at the start of the Great Recession. Optimists see the rise in corporate debt as investment in future economic production. What the optimists overlook is that much of this new corporate debt is being used for stock repurchases to raise the value of the stock options that corporate executives have granted themselves. Source: St. Louis Fed.

In a broad sense some sympathy for the liberal case is due: if public policies benefit most people by reducing unemployment and raising wages then some of the asymmetries in economic distribution can be set to the side. The theoretical case put forward, that low interest rates reduce the debt service costs of corporations and people and provide incentive for productive investment, makes intuitive sense if the issues are framed tightly enough. The rub comes at the intersection of the available policy choices and one’s assessment of the nature of capitalist political economy. The Federal government can directly affect economic outcomes for the broad populace through fiscal policies and / or it can leave economic distribution to the vagaries of market forces through controlling the price of money (monetary policy). Given the de facto abandonment of fiscal policies in recent decades in favor of monetary policies the shift in political economy is brought into clear focus— the bi-partisan political response to market failures like unemployment and increasing poverty is more markets. This leaves the ‘better than nothing’ caucus of liberal economists ‘explaining’ policies to raise financial asset prices as good for all when they are at best a slight variation on plain old (Ronald) Reagan era trickle down economics.


Graph (4) above: the recent rise in house prices is widely perceived to be a good thing— more middle-class wealth is tied to house prices than to financial assets. What is less well understood is that the rising prices are concentrated in areas that have seen repeated boom-bust cycles, that much of the lower priced housing has been bought by hedge funds using cheap money from the Federal Reserve to turn these houses into rental properties and that rising prices are now concentrated in the most expensive housing. This very expensive housing is by and large being used to hide money looted by a global plutocracy that may need to make a quick getaway. Additionally, whatever the vagaries of defining ‘inflation,’ a rise in house prices above the rate of inflation that lacks a fundamental explanation is a bubble. Source: Robert Shiller.

The as-yet unstated punch line in all of this is that given the degree of financialization across the global economy any tendency toward higher interest rates will have a much-magnified impact. The left-right critique of Fed policies tends toward the intentional enrichment of connected insiders— crony capitalism, further instantiation of finance into global political economy following the economic catastrophe of the Great Recession, the commitment of openly criminal acts to save Wall Street at all costs in 2008 – 2009 and generally serving as a tool of the global plutocracy under the guise of acting in the public interest. The mainstream case in support of accommodative Fed policy assumes away its distributional consequences in favor of the improbable view that if one of ‘us’ is made richer ‘we are all’ made richer. In contrast, a class-based view aligns economic power with political power to suggest that the more asymmetrical income and wealth distribution are the further away from any meaningful notion of democracy is the result. And all of this leaves aside the distance between the effects of Fed policy in theory and in fact. In theory corporate executives act as agents in the interests of the corporations they manage. In fact Fed policy has perfectly aligned executive and self-interests— cheap debt and inflated stock markets are a formula for looting. In theory low interest rates and rising asset prices allow bankers to repair their balance sheets against future crises. In fact Wall Street has used Fed policy to re-leverage and the too-big-to-fail guarantee to award itself huge payouts knowing that when the next inevitable crisis hits it will once again be bailed out.


Graph (5) above: lest it remain unclear who benefits from Fed policies to raise asset values, it is the very rich who own most assets. Corporate executives use stock market returns to boost their incomes (Graph (2) above) on the backs of company employees whose labor is being leveraged. The otherwise very wealthy have their fortunes tied to stock market returns as well. Illustrated above is the close relationship between the average wealth of the top ten percent richest families in the U.S. and movements in stock prices. This is confirmed in the much larger percentage of stocks than bonds owned by this group in the Fed Survey listed below. Were bond returns predominant there is no possibility that the correlation between the net worth of the richest and stock market returns would be what it is. R^2 is the squared correlation coefficient. The difference R^2 = .32. Source: Fed Survey of Consumer Finances.

One likely reason for the rush to defend Fed policies is the upcoming mid-term elections. This isn’t to suggest insincerity in mainstream economic assertions of the benevolent intentions of the Fed. These folks have to sit in rooms together and make public proclamations about how the Fed’s banker economics are ‘economics.’ And liberal support for ‘dovish’ monetary policies is longstanding. But President Barack Obama and former Fed Chair Ben Bernanke made a deal with the devil by resurrecting Wall Street’s murder-suicide ‘business’ practices. Raising interest rates in current circumstance— with a re-financialized, highly leveraged, economy just before an election that will be in some measure a proxy for Mr. Obama’s performance in office risks as radical a repudiation of the Democrats’ Wall Street- plutocrat friendly policies as met the Bush Republicans in 2008. Should Wall Street reap some of the unpleasantness it has so prolifically sown in recent years things could get very ugly real fast. To be clear, this isn’t doom and gloom prognostication but simply working through the mechanics of the impact of rising interest rates on a highly leveraged economy. That monetary policy is a central point of contention at this point in history demonstrates the complete capture of Western political economy by moneyed interests.

Rob Urie is an artist and political economist. His book Zen Economics is forthcoming.