The crisis in the USA - in the shadow of the "Fed"

Winter 2022


This article was written by the American Trotskyist group known as “Spark', and comes from their journal “Class Struggle; Fall 2022, Number 113" written under the title: ‘The Fed: hatchet man for predatory capitalism".

    The US “Fed”, the Federal Reserve bank, plays a similar role to the Bank of England.  It is the state’s central bank, holding gold and currency reserves in custody and has responsibility for maintaining the stability of the country’s monetary and financial system...  To that end, it for instance, fixes interest rates which determine the rates which all banks then impose on borrowers.  Since the US is the world’s largest and wealthiest economy, and the leading imperialist power, what the Fed does, determines what all the other central banks in the world do...

    Today it is presiding over - and promoting – the world slide into desperate poverty of the working classes that has yet been seen in the world’s richest country.  Life expectancy is falling.  The scenes are reminiscent of the Great Depression.  Yet at the other end of the social scale the Fed helps ensure that the big business and financial speculators can thrive, as never before... 

    At a financial conference in May, one of the most powerful bankers in the world, the CEO of JPMorgan Chase investment bank, Jamie Dimon, issued a dire warning about the economy: “You know, I said there’s storm clouds but I’m going to change it...  it’s a hurricane”.  Addressing a roomful of analysts and investors in New York City, Dim on warned, “You’d better brace yourself".

    This “hurricane,” according to Dimon, could result from the attempt of the Federal Reserve bank to reverse the “emergency” measures it has been taking for decades.  The Fed had been providing enormous amounts of almost free money to the biggest financial companies, like Dimon's own JPMorgan Chase.  But now, said Dimon, the Fed “doesn’t have a choice because there’s too much liquidity in the system.  They have to remove some of the liquidity to stop the speculation, reduce home prices and stuff like that”.

The Fed had never done this kind of reversal before, said Dimon, “…so you’re looking at something you could be writing history books on for 50 years”.

    Over the last decades, each time the workings of the capitalist system produced a new financial crisis - the Fed rushed to bail out the system by flooding it with practically free money.  This might have saved the financial system from complete collapse at a given moment, a collapse that might have pulled down the rest of the economy with it.  But the infusion of vast amounts of liquidity only set the stage for the next crisis, which was even bigger and therefore required a still bigger Fed bailout.  This crisis-bailout pattern escalated to the point that in response to the monstrous 2008-09 financial meltdown, the size of the Fed bailout then was so gigantic and so wide ranging, it overshadowed all previous bailouts.  But that wasn't the end of it.  For the 2008 bailout only set the stage for an even steeper financial collapse during the 2020 economic shutdown at the start of the COVID-19 pandemic...  and a more extreme bailout from the Federal Reserve.  In response to that collapse, the Fed, under Jerome Powell, did virtually everything that had been done in 2008 and 2009.  But in 2020, the Fed did it over a period of days, rather than over several months.  However, the Fed Flooded the financial system with so much liquidity, it spawned double-digit housing price increases, what the Wall Street Journal called a “frenetic housing market”; the rise of cryptocurrencies; crazy speculation by day traders on little-known companies (Game Stop) and on companies in the middle of bankruptcy (Hertz); and even negative interest rates (when the depositor/saver pays interest to the bank, rather than the other way round), of all things.

    So, today, the Federal Reserve has reversed itself, unleashing what could become Dimon's “hurricane,” whose damage and destruction the population will pay for.

Increasing speculation and debt

All those Fed programs that provided easy money to the financial system were presented as ways to stimulate economic activity, giving banks the means to provide loans at low interest rates to increase productive investment, with higher employment and more consumption.

    But the capitalists always had other plans.  Highly profitable companies, flush with cash and given cheap and easy lines of credit, increasingly transformed themselves into financial companies or banks.  Take Apple, whose stock price zoomed upwards over the last 10 years.  Apple had amassed huge piles of cash, hundreds of billions of dollars.  But on top of that, it borrowed even more money; money that it used to rapidly increase dividends and stock buybacks, pumping up the price of its stock.  As for the cash it had on hand, Apple used that in various financial operations.  It thus acted increasingly like a bank.  Apple's financial operations became so big, a 2015 Bloomberg headline declared, “Apple Is the New Pimco, and Tim Cook [the Apple CEO] is the New King of Bonds” (Pimco is a major financial company).  But all these financial manoeuvres have now left Apple weighed down by corporate debt of $130 billion [£107bn).  That growth of debt will continue because Apple, in order to further the wealth of capitalist stockholders, has paid out another $91 billion (£75bn) so far this year in dividends and stock repurchases, three billion more than its profits.

    Almost all big companies have been following a similar trend.  According to a recent study by the economist, William Lazonick, in the years 2015-19, the biggest US companies handed out more than they made in profit (112% of their profits) to their top shareholders.  What matters most in this deranged system is what enriches stockholders.  Today, that means companies need access to debt markets so they can pour even more money into such operations.

    McDonald's, for example, borrowed $21 billion between 2014 and 2019.  The company used the cash to help finance $35 billion in stock buybacks.  It also paid out $19 billion in dividend payments, giving the owners of stock $54 billion during a period when the company made only $31 billion in profit.

    Between 2014 and 2020, Yum! Brands, the conglomerate that owns fast-food chains Taco Bell and KFC, boosted its debt from $2.8 billion to $10 billion. Its debt went from 42% of its total sales up to 178%, the consequence of financing ever more fabulous payouts to its capitalist shareholders.

    The capitalist class is cannibalising its own productive system in order to increase its wealth.

    On the other hand, the infusion of Fed money has also accelerated the activity of financial companies that hunt and plunder parts of the economy for their own profit, sowing massive destruction in their wake.  These so-called private-equity companies collect pools of money from pension funds, endowments, and wealthy individuals, using that money to buy up companies in nearly every economic sector, from retailing to food to health care and housing.  They overload the companies with debt, making them unsustainable.  They slash jobs and benefits for employees, cut services and hike prices for consumers, often endangering lives and undermining the social fabric.

    Their record is truly barbaric.  Private-equity firms presided over m any of the largest retailer bankruptcies in the last decade.  Among them Toys“R"Us, Sears, Kmart, RadioShack, and Payless Shoes; all bankruptcies that destroyed over 600,000 jobs, according to one investigation.  Other investigations have shown that when private-equity firms buy houses and apartments, rents and evictions soar.  When they buy hospitals and doctors’ practices, the cost of care shoots up.  When they buy nursing homes, patient mortality rises.  When they buy newspapers, reporting on local governments dries up and engagement in local politics declines.

    The private-equity sector continues to grow quickly, with the year 2021 setting a new record.  According to Mckinsey, private equity's total holdings under management reached almost $6.4 trillion (£5.2 trillion), and estimates are that companies controlled by private-equity firms employ nearly 12 million workers in the US.  All this shows just how much more predatory the capitalist class has grown over the last 10 years, and to what extent its activity has rested on complicity from the Fed.  The massive increase in stock prices and the great expansion of financial markets are not a sign of economic health, but of ever greater speculation and the growth of debt.  The enormous increase in wealth concentrated at the top came at the expense of the rest of society.

Attacks against labouring people

The ordinary population now faces a new crisis:  a sharp rise in prices for vital necessities, a rise not seen in more than four decades.  It is a crisis that the Fed helped fuel by pumping trillions of dollars in “liquidity” into the financial system in a matter of months.  Now big corporations are rushing to take advantage of the crisis by hiking prices, while restricting supply.  Here's a typical quote about how sharp price rises coupled with lower sales on Doritos, Lays, Ruffles, Tostitos and Fritos have fattened the corporate bottom line: “The truth is that our brands...  are being stretched to higher price points and consumers are following us”, PepsiCo CEO Ramon Laguarta said on a conference call on October 13.

    So far, it's been a successful strategy for the capitalists.  Not just profits, but profit margins have been hitting record highs. 

    But this successful profit grab for the capitalists spells a new attack on the population's standard of living in every direction.  Any small wage increases that workers might have gotten were more than eaten up by the rise in prices.  Small businesses - mom -and-pop stores - floundered.  The hiking of prices is impoverishing more people every single month. Sharply raised prices on big ticket items, such as homes, new and used cars and furniture, have made these items increasingly out of reach.  The much higher prices are coupled with much higher finance costs – double whammy.  Those millions of workers who have been resorting to running up credit-card debt to meet the skyrocketing cost of living expenses are getting hit by big increases in interest rates as well: disaster upon a disaster.

    No one is spared from this attack.  Many of those living on fixed incomes, starting with retirees, whose living standards were already being ground down, can no longer pay their bills.  And those hoping to retire, who depend upon their own savings, find that their 401(k)s (special retirement savings plans) are shrinking fast.

    The full effect of the crisis has yet to take hold.  Powell now says that increases in unemployment are necessary, although he doesn't put it so bluntly.  There will be “some softening of labour market conditions”, he says, and that “will also bring some pain to households and businesses.  These are the unfortunate costs of reducing inflation”. “Unfortunate” but necessary “pain”:  behind all the talk about pandemic, supply shortages, Ukraine and oil - this was the point of his major policy address at Jackson Hole in late August.

    The employment situation for the working class is already dire, even before a new wave of unemployment hits.  Powell, reinforced by the news media, claims that the unemployment rate is extremely low, less than 3.5%.  That's a statistical trick that depends upon ignoring most of the jobless.  In other words, a lie.  Rather than unemployment reaching record lows, it is rising to new heights.  The reserve army of the unemployed, as Karl Marx called it, is getting larger.  One official indication of joblessness, the labour force participation rate, currently stands at 62.4%, and has been declining over the last 20 years.  This means 37.6% of the working age population is not involved in any economic activity.  Joblessness is now worse than it was in 2019, that is, before the pandemic – despite all the complaints by employers and government officials about a supposed labour shortage.

    The capitalist class created this growing permanent mass of unemployed through big job cuts, downsizings and workplace closing.  Many of the jobless have been unemployed for so long, they not only have become discouraged and have given up looking for work, but they have also lost their skills, in a country where the government doesn't organise job training or practical education.  Others have been physically unable to work because they continue to suffer from long-term COVID or other ailments that they contracted because of unsafe and unhealthy working and living conditions.  Millions more can't work because it is up to them to take care of sick or handicapped relatives or young children since social services or other support, which never were adequate, have been subject to cutbacks for decades.

    But joblessness doesn't stop there.  There are millions more who don't have a steady job.  These millions make up a new sector of modern slavery:  freelancers, self-employed or micro entrepreneurs, and “Uberized” workers.

    Officially, the government considers them to be “employed.”  But day-to-day they don't know how much income their work will bring them - if any.  They are the barely employed.

    Taken all together, the great mass of jobless and those barely employed is already at depression levels.  The tents and homeless encampments, in big cities and small, make up the modern version of “Hoovervilles” - the camps of homeless which sprang up in during the Great Depression of the 1930s.  They are filled with millions of people who are already either completely homeless and living on the street, or else have no secure housing, no permanent address.  Many of the homeless and near homeless have jobs.  They have families.  But their work isn't steady, or else they don't make enough to pay the rent.

    One thing that this all adds up to, is a real decline in life expectancy in this country.  According to official statistics, life expectancy declined three years in a row, starting in 2015, and it declined again in 2020 and 2021.  Such a reversal in life expectancy has not been seen since 1918, in the period right after World War I when the Great Influenza Epidemic spread widely through the population.  No other developed country has seen a multi-year drop in life expectancy outside of wartime.

    Certainly, there are many reasons for this decline.  Over the last couple of years, one could point to the casualties from the COVID pandemic, although nowhere amongst the richer, more advanced economies was there anywhere near this kind of decline.  Also, some economists now recognise that over the last couple of decades there has been a big increase of what they call “deaths of despair”, that is, suicides, drug overdoses, liver failure caused by increased alcohol use, especially in rural and semi-rural areas, where there has been an epidemic of factory and mine closings and work has dried up, although the numbers are now increasing everywhere, throughout the country.

    Of course, there are all kinds of contributing factors behind this unprecedented fall in life expectancy, such as a miserable, dysfunctional health care system, when it comes to providing for the needs of the working population.  But in the end, what it all comes down to is the advanced social and economic gangrene, caused by the drive by capitalists for ever more profits and wealth. The fact this is happening in what is considered to be the richest country in the world shows that no one is safe in this world organised by capitalism.

    No, not even in this, the wealthiest of the capitalist economies, with all the technology and science at their fingertips, is the capitalist class able to run society so that the working population has an adequate and decent standard of living.  It can't even provide the bare minimum.

    It's in this situation that the Fed proposes now to impose “some pain” on households.

    In 1848, writing about the capitalist class of their day, Marx and Engels drew this conclusion: “It has become evident, that the bourgeoisie is unfit any longer to be the ruling class in society, and to impose its conditions of existence upon society as an over-riding law.  It is unfit to rule because it is incompetent to assure an existence to its slave within his slavery, because it cannot help letting him sink into such a state, that it has to feed him, instead of being fed by him.  Society can no longer live under this bourgeoisie, in other words, its existence is no longer compatible with society”.

    One-hundred-and-seventy-four years later, that same capitalist class has become much more predatory and destructive of human life, throwing nearly 40% of the population out of productive life in this, the country where wealth oozes from every pore and drips from every chandelier.

    In 1848, looking at Europe, Marx and Engels also noted that capitalism was not only a chaotic disaster, but a system whose logic had produced and developed the instrument that would overcome it: “The advance of industry, whose involuntary promoter is the bourgeoisie, replaces the isolation of the labourers, due to competition, by the revolutionary combination, due to association. The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products.  What the bourgeoisie therefore produces, above all, are its own gravediggers.  Its fall and the victory of the proletariat are equally inevitable”.

    If that didn't happen as rapidly as Marx and Engels envisioned in 1848, capitalism since has spread throughout the world, creating not only in Europe, but everywhere, including in this country, the system's gravediggers.

25 October 2022