Have you been wondering why, with the abundance of bad economic news in recent months, the stock market in the U.S. has been going up sharply? With a forecast by IMF economists of an 8% drop in GDP in the U.S., more than 30 million layoffs, a plunge in consumer spending predicted, a surge of defaults, bankruptcies, foreclosures, evictions and repossession coming as the forbearance program of the CARES relief act ends soon, and a dramatic increase in the number of COVID19 cases, why is the stock market moving back to the levels reached prior to the lockdown in mid-March? And is the stock market surge a sign of overall economic health, the leading edge of a "V-shaped recovery", as proclaimed by bankers, traders and market analysts, and echoed by officials of the Trump administration and neoliberals in the Republican Party?
The late American economist Lyndon LaRouche often stated that, just as money is not a measure of real value in an economy, neither is an appreciation of stock valuations a sign of a healthy economy. The euphoria over daily or even hourly stock market jumps is rather a sign of delusion, or just plain idiocy, which unfortunately characterizes most economic and financial commentary. A review of the bubbles in stock and bond valuations since 1987, which inflated and then popped, when contrasted to the ongoing decline of physical goods production, especially in machine tools and heavy industry, demonstrates that the rise of stock values has been driven by something other than real economic growth. This unhealthy dynamic was examined most effectively by LaRouche in his development of his Triple Curve Function, which he introduced in 1995. (1.)
This dynamic has been especially pronounced since the 2008 crash. The steady climb of stock prices following that crash, came largely as a result of increasingly cheap credit from the Federal Reserve, beginning with the post-crash bailouts, including various forms of Quantitative Easing. But even with the unprecedented injections of liquidity from the Fed into the hands of the largest banks, hedge funds, and "shadow banking" operations, the bubble ran out of steam on August 14, 2019, according to a study by Pam and Russ Martens in Wall Street on Parade. They point to a run on bank stocks on that day, with JP Morgan Chase falling by 4.15% and Citigroup by 5.27%, as when the present financial crisis began.
This collapse moved into a new, more desperate phase on September 17, when the Fed was forced to take over the lending on the overnight "Repo markets" from several banks, including JP Morgan Chase. Repos provide 24-hour loans, to insure that liquidity is available to prevent a possible chain-reaction of defaults, to cover debts on all sorts of instruments which are coming due, and for which the firms owing the debt must access short-term liquidity, as they lack the means to even pay the interest. From that day until the first announcements from China of the spread of the Coronavirus in early January, the Fed made over $6 trillion in revolving emergency loans through the Repo markets. This enabled traders to continue buying and selling all forms of financial instruments at face value or higher, even though there was little or nothing of tangible value underlying those instruments.
While few in the general public were aware of this flood of liquidity coming from the Fed, to bail out insolvent banks and the zombie corporations and firms they were aiding, it was the source of the Wall Street "happy talk", that all is well with the banking industry. It was repeated ad nauseum, as though repetition made it true. As Congress was passing the Coronavirus Aid, Relief and Economic Security Act—the CARES Act—nearly unanimously, backed by the leadership of both parties, with provisions extending the funds for an unprecedentedly huge, continuing bailout—Trump economic adviser Larry Kudlow stuck to this narrative, stating at a March 24 press conference, "We started the year very strong and then we got hit by the coronavirus."
In reality, the Coronavirus pandemic provided an excuse to move into a new mega-bailout to protect "Systemically Important Financial Institutions", which were in dire need of liquidity—that is, the "everything bubble" was popping, and the fear was that a domino-style collapse, including of major money-center banks, was almost certainly looming unless a big bailout was forthcoming. Unlike in 2008, when many people took to the streets to protest the initial bailout bill—which was defeated at first in the House—the pandemic lockdown beginning in March 2020 definitely contributed to a muted response against the speculative swindle embedded in the CARES Act. (2.)
THE CARES ACT MEGA-BAILOUT SWINDLE
The CARES Act was sold as a means to cushion the blow from the lock-down, which was implemented to address the coronavirus pandemic. It included a one-time cash payment to Americans making less than $75,000 per year, a supplement to unemployment payments, funds to keep small businesses alive, and a promise to provide funds to cover emergency costs to combat the pandemic, at the city, county and state level. This part of the CARES Act was dubbed a "Main Street" relief Act. Of the original $4+ trillion in the package, more than $3 trillion was to be allocated for this purpose. It is still not clear how much of this has actually been allocated, especially the funds which were mandated to be channeled through banks to small businesses and enterprises.
The CARES Act additionally provided a slush fund of $454 billion, through the Treasury, with funds provided by the Fed, which could be leveraged ten times. That means over $4.5 trillion can be provided by the Fed, to bail out bad loans at the biggest Wall Street banks, trading houses, hedge funds, in the commercial paper market, money market funds, corporate bonds, even allowing the purchase of junk bonds. The world's largest asset manager, BlackRock, was chosen to dispense the Fed funds through eleven "special purpose vehicles", a tactic which enables the Fed to circumvent rules against its purchase of riskier assets, which are now flowing into the Fed's vaults.
BlackRock is at the center of the move for a "regime change" in financing, which it unveiled at last year's annual Fed conference at Jackson Hole, Wyoming in August. This involved establishing a "Standing Emergency Fiscal Facility", run by an "independent expert" appointed by the Fed, to unify monetary policy and fiscal policy, i.e., to remove the budgetary process from elected representatives, and place it instead in the hands of financial managers! This was essentially done in the CARES Act, which made BlackRock the administrator of the $4.5 trillion in bailout funds. Not surprisingly, among the first recipients of these funds were BlackRock's own investment companies. As economist Ellen Brown describes this in her article "Meet BlackRock, the New Great Vampire Squid," the world's largest and most influential asset manager, is now "in the driver's seat in controlling the economy," using funds from the Fed to determine winners and losers.
Even though much of the $4.5 trillion plus has not yet been dispersed, the commitment to bailout speculators has led to a surge on Wall Street. After having fallen from a peak of almost 30,000, to 20,188 by March 16, the Dow Jones average has gone up to 25,755 as of June 25, leading many analysts to proclaim that this is the beginning of the hoped-for V-shaped recovery.
Not so fast, said Fed chair Jerome Powell, in a statement last week, we are not there yet! He announced that since there remains "significant uncertainty" about a bounce back, the Fed decided to keep interest rates at their present low rate through 2022. By uncertainty, can one assume that Powell realizes that feeding a stock bubble through cheap interest rates will not help the vast majority of Americans who are living, at best, from paycheck to paycheck, and who have no resources to purchase stock. The richest 10% of Americans own 85% of stocks, while the richest 1% to 2% are the ones who can access the liquidity, enabling them to become even more prosperous, as they will be handed free money to buy the depressed assets available, anticipating that the flood of liquidity will cause their values to rise.
A SOLUTION TO THE ESCALATING COLLAPSE
A survey published by the credit bureau TransUnion showed that there will soon be a "tidal wave of defaults and evictions" when forbearance provisions of the CARES Act expire in the next months. Under CARES, people are allowed to skip payments, or make partial payments on outstanding costs and debt. This affects 3 million auto loans, 15 million credit card accounts, and 4.75 million homeowners (9% of all mortgages). Just as corporate debt has risen to completely unsustainable levels—even with the bailout funds allocated thus far—all forms of personal debt have soared, with little means to extinguish it, or even catch up. When the forbearance provisions end, debtors will be expected to pay the full amount, and make up for what was not paid, leading to new levels of defaults.
The problem should be obvious. The real cause of the present economic crisis in western nations has been the combined effect of deindustrialization, driven by "free trade" agreements, and anti-growth green policies, which have led to a shift away from goods production, into employment in the "service" and "consumer" sectors—with lower wages and less benefits. Federal Reserve policies which provide quick, cheap cash to speculators to purchase stock and bonds, knowing they can always sell these instruments to the Fed, may keep the banks and other financial institutions in business for the time being, but will not rebuild the real physical economy, which is necessary to enable people to escape an economy driven by low wages, high unemployment, and with those still employed often trapped in dead-end, non-productive jobs. With all the freshly created liquidity flowing to the speculators, there is virtually no credit which can be made available to producers.
What is needed, instead, is a recovery program, which transforms what LaRouche called the "physical economy", that is, those activities engaged in physical goods production, and in producing new technologies based on scientific research and development, which promote increases in productivity. LaRouchePAC has published a new report, "The LaRouche Plan to Reopen the U.S. Economy: The World Needs 1.5 Billion New Productive Jobs," which, if implemented, would generate a transformation of the real economy. As the neoliberal economic paradigm has failed, it is necessary to break with the axioms underlying that failed system, which has been devolving for five decades, and is largely responsible for the insurgency against the establishment which is growing worldwide.
No amount of happy talk, statistical manipulation, or wishful thinking will make the BlackRock plan an engine for anything but the creation of more debt, a short-term reprieve for speculators, further deterioration of the physical economy, and lead to a likely hyperinflationary collapse. This is not inevitable, but immediate action, as specified in the "LaRouche Plan" is required, to take economic policy away from the speculators and their neoliberal apologists. This is in keeping with the best periods of economic growth in U.S. history, as the Constitution was written by those who placed the "general welfare" ahead of private gain.
1.) While one can find many articles by LaRouche, and about his Triple Curve Function, at larouchepub.com, a good place to start is this article: https://larouchepub.com/eiw/public/1999/eirv26n30-19990730/eirv26n30-19990730_023-larouches_triple_curve_collapse.pdf.
2.) I wrote several articles about the present collapse occurring before the Coronavirus lockdown; see for example: https://harley.larouchepac.com/don_t_blame_the_corona_virus_for_the_crash_of_the_system, written on March 2, 2020.