by Michael Roberts
US real GDP growth for the second quarter of 2018 was confirmed
at an annual rate of 4.2%. And that means US real GDP is 2.9% higher
than one year ago. The ‘annualised’ rate was the highest since the third
quarter of 2014. Similarly the year on year rate is the highest since
2014. But not the highest rate in history – as President Trump claims!
But it does show a relative recovery from the near recession rates of 2016.
But as I have mentioned before in previous posts,
the underlying story is not so sanguine. First, the 4% ‘annualised’
growth rate is really dependent on some one-off factors that will soon
turn into their opposites. US net exports was a big factor in the 4%
rate and this was mainly due to the rush by China to buy up American
soybeans before tariffs on US exports took effect in retaliation to
Trump’s trade war with China.
Second, growth has been jacked up by Trump’s huge tax cuts for
corporations on their profits. While pre-tax profits for the major
corporations have risen a little, it is post-tax profits where there has
been a bonanza. According to a recent report by Zion Research, for the
top 500 US companies, 49% of their 2018 profits were due to the Trump
tax cuts. For some sectors, like the telephone companies, it was 152% of
2018 profits ie from loss to profit.
Nevertheless, mainstream economics seems generally convinced that the
US is out of its Long Depression of the last ten years and is now
motoring ‘normally’. The official unemployment rate is at all-time
lows, wages are beginning to rise a little and inflation has ticked up
marginally.
So the US Federal Reserve decided to push up its policy interest rate
for the eighth time since 2015 to reach 2.25%. The rate is used to set
credit card, mortgage and loan rates and will trigger rises across the
board for consumers and businesses. In a statement the Fed signalled
more rate hikes were imminent. “The committee expects that further
gradual increases in the target range for the federal funds rate will be
consistent with sustained expansion of economic activity, strong labor
market conditions, and inflation near the Committee’s symmetric 2%
objective over the medium term. Risks to the economic outlook appear
roughly balanced,” So the Fed seeks to ‘normalise’ rates in line
with the ‘normal’ growth of the US economy and reckons its economic
forecasts are about right.
But as I pointed out in a previous post,
if the Fed is wrong and the productive sectors of the US economy do not
resume ‘normal growth’ (the average real GDP growth rate since 1945 has
been 3.3% – so growth is not back there yet), the rising costs of
servicing corporate and consumer debt could lead to a new downturn.
The key factor for growth is investment by the capitalist sector.
And what decides the level of that investment in the last analysis is
not the level or cost of debt but the profitability of any investment.
Business investment has made a modest recovery in the last few quarters,
driven by the 16% rise in corporate profits after tax. But the bulk of
this profits bonanza for US corporates in 2018
has been used to pay higher dividends to shareholders and buying back
company shares to boost the share price, not in productive investment.
And within productive investment, most has gone into the oil industry
and into ‘intellectual property’ (software etc). Investment in
equipment and new structures in other businesses has been very modest.
Moreover, non-financial corporate profits are still below levels of 2014, even after Trump’s boost.
And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.
At the other end of the economy, average incomes for American families are making little progress. In an excellent post,
Jack Rasmus of the American Green Party showed that for non-supervisory
workers (non-managers) who are the bulk of the American workforce (133m
out of 162m), real incomes are falling not rising, while the burden of
consumer debt is rising. When Trump announced his corporate tax cuts, he
claimed that this would allow companies to increase wages from their
increased profits. This, of course, has turned out to be nonsense.
There has been very little increase in private sector wage compensation
since the end of 2017.
And it is only in the US that we can talk about ‘recovery’ or
‘normal’ growth. Everywhere else hopes of a return to pre-crisis growth
rates seem dashed. In the Eurozone, growth has slipped back to around
2% a year, still one-third below pre-crisis rates.
In Japan, it’s back at 1%. China too is ‘struggling’ to stay above 6% a year.
As the OECD put it in its latest interim report on the global economy: “Global
growth is peaking; the trade war is beginning to bite; investment
growth is still too weak to boost productivity; real wages are still
below pre-crisis levels; and the losses in income from the Great
Recession will never be recovered.”
“Trade tensions are starting to bite, and are already having
adverse effects on confidence and investment plans. Trade growth has
stalled, restrictions are having marked sectoral effects and the level
of uncertainty on trade stances remains high.”
So “It is urgent for countries to end the slide towards further
protectionism, reinforce the global rules‑based international trade
system and boost international dialogue, which will provide business
with the confidence to invest,”.
And as for the so-called emerging markets, the situation continues to
deteriorate. According to the IIF, growth tracker, emerging market
growth is now at a two-year low.
And as interest rates globally rise (driven by the Fed) and trade
wars begin to squeeze global trade, emerging markets with high corporate
debt are especially vulnerable.
The right-wing government of Argentina has now had to swallow a
record-breaking IMF bailout of $57bn. IMF chief Lagarde said that, as
part of the deal, Argentina’s central bank can only intervene to
stabilize its currency if the peso depreciates below 44 pesos to the
dollar. It is currently at 39 pesos to the dollar after losing 50% of
its value since the start of the year. The president of Argentina’s
central bank, Nicolás Caputo, resigned because of this condition.
The size of the bailout shows how desperate the IMF is to support the
right-wing government in Argentina, but also to remove any independent
action by the Argentine monetary and fiscal authorities. Argentina’s
economic policy is now being run by the IMF. Argentina is now under the
grip of IMF dictates, something the right-wing Macri government said
would never happen again. A massive slump and austerity will now follow
for the Argentine people – repeating the hell of the last major slump of 2001.
At the same time, the Turkish economy is in meltdown.
There the Erdogan government refuses to take IMF money in return for
austerity and control over its currency and interest rate policy –
unlike Argentina. But it will make no difference: both countries cannot
avoid a serious slump as interest rates spiral and inflation rockets.
There is one economic lesson to be learned here. When Greece was
locked in the straitjacket of the so-called Troika (the IMF, the ECB and
the Euro group), many Keynesians and radicals said
that the reason Greece was in this mess was that it was inside the
Eurozone and so it could not devalue its currency or control its
interest rates. If it broke away, it could control its own destiny.
Well, Argentina and Turkey now show that it was not the Eurozone as
such that was the problem, but the forces of global capitalism. Both
Argentina and Turkey control their currency and interest rate policy.
The former has opted for IMF control and the latter refuses it. But it
will make no difference – the working people in both countries will pay
the price for the crisis in their economies.
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