Dr. Susmit Kumar, Ph.D.

1.     Introduction

In this paper, we will see that the US Federal Bank has been committing fraud, not only with the common Americans but with the people of the entire world and with entire global economy. By systematically reducing interest rates to enable the US government to pile on debt, it created not only stock market bubbles world-wide but also unprecedented wealth inequality globally by transferring massive amount of money to ultra-rich from all others. Without it the so-called bogus-economic theory Reaganomics would not have been in the dictionary at all. During the 2008 financial crisis, US Fed deemed Wall Street banks and other big financial institutions “too big to fail.” Now it has granted the same elite status to a significant swath of the American private sector after the crisis unleashed by the pandemic.

2.     US Fed and Stock Market Bubble

The US Fed has become a prime enabler of the fraud committed by the US government not only on its citizens but on entire world. Taking advantage of its currency being the global currency, the US Fed Chairman is in a position to set the benchmark interest rate in the global economy. The US Fed started to reduce the interest rate to enable the US government to pay interest on its debt which is increasing year after year. This, in turn, created bubbles in stock markets all over the world. As only few people invest in the stock market, it has created wealth inequality globally.

After the 2002 midterm elections, the then Vice-President Dick Cheney started proposing another round of tax cuts. Treasury Secretary Paul O’Neill then told him, “the government is moving towards a fiscal crisis” and explained what rising deficits meant for economic and fiscal soundness. A few weeks later, the then President Bush asked O’Neill to submit his resignation (Ron Suskind, The Price of Loyalty, Simon & Schuster, New York, p 291, 2004) and found a Treasury secretary who would rubber-stamp his tax cuts. It is worth noting that O’Neill, a lifelong Republican, successfully ran Alcoa, the world’s largest aluminum producer, for twelve years as its CEO and chairman.

The US government has been running budget deficits for last three decades. In the aftermath of the 2008 Great Recession, both the Bush, Jr. and Obama administrations ran huge budget deficits to provide stimulus (as shown in Chart 1). Afterwards, the yearly budget deficit gradually went down but still it was more than $500 billion a year. Trump’s tax-cut to rich has ballooned the budget deficit to $1.3 trillion and $1.2 trillion in 2018 and 2019, respectively. Due to the massive stimulus package to mitigate the Coronavirus damage on economy, the 2020 budget deficit may be as large as $4 trillion in 2020 (Federal Budget Deficit Will Approach $4 Trillion In 2020, CBO Says, As The Economy Continues To Nosedive, Sarah Hansen, Forbes, April 24, 2020).

“Although the debt increased by nearly 300% (from 2000 to 2019), the interest payment increased by only 59% (from 2000 to 2019). The trick behind it is the US Federal Bank gradually reducing the interest rate.”

Table 1 shows the US Treasury debt. From 2000 to 2019, the treasury debt increased from $5.6 trillion to $22.7 trillion. Table 2 shows the yearly interest paid by the US government on its debt. In 2000, the interest payment was $362 billion whereas in 2019, it was $575 billion, i.e. although the debt in these years increased by nearly 300% (from $5.6 trillion to $22.7 trillion), the interest payment increased by only 59%. The trick behind this low increase in interest payment was due to the US Federal Bank which has been gradually reducing the interest rate as shown in Chart 3 (which was directly affecting the interest rate US government was paying interest on its debt as shown in Chart 2) so that the interest payment by the US government would be manageable. At 2000 (6%) and 2008 (4%) rates, there would have been an additional $920 billion and $460 billion (for each percent increase in interest rate, the interest payment increases by $230 billion), respectively, interest payment by the US government which would have increased the debt to $2.12 trillion and $1.66 trillion, respectively in 2019 instead of $1.2 trillion. (and if you consider the cumulative effect of previous years of additional interest payments, it would be an additional $3 trillions to $7 trillions over last two decades, i.e. instead of $22.7 trillion debt, the total debt would have been $26 trillion to $29 trillion.) Anyway, now due to President Trump’s tax cut and huge stimulus to mitigate the Coronavirus carnage on US economy has increased the US treasury debt to a level which is unsustainable for the US government to pay even its interest every year and it is going to cause debt to increase exponentially which will explode the entire US economy.

Chart 1 US Budget Deficit in Billions (USD)

 Chart 2 Interest Rate on US Treasury Debt

 Chart 3 US Fed Rate

3.     Unprecedented Inequality of Wealth

If you keep your money in an US bank, then you would get 1% interest rate right now (because of low US Fed Rate) and hence people are flooding the stock market where they see several times higher gain. Wall Street investors have access to the funds from the US Fed rock bottom interest rate which they invest in Emerging Markets like India and elsewhere to fuel the Stock Market bubble world-wide. On the other hand, main street, i.e. common people do not have access to US Fed rock bottom interest fund.

Data from the US Federal Reserve show that over the last decade and a half [between 2000 and 2017], the proportion of US family income from wages has dropped from nearly 70 percent to just under 61 percent. It is an extraordinary shift, driven largely by the investment profits of the very wealthy. In short, the people who possess tradable assets, especially stocks, have enjoyed a recovery that Americans dependent on savings or income from their weekly paycheck have yet to see. Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster. Wealth, real wealth, now comes from investment portfolios, not salaries. Fortunes are made through an initial public offering, a grant of stock options, a buyout or another form of what high-net-worth individuals call a liquidity event (The Recovery Threw the Middle-Class Dream Under a Benz, Nelson D. Schwartz, The New York Times, Sept 12, 2018).

On top of that, wealth inequality tends to be self-reinforcing — people make money off their wealth (via returns on whatever investments they've made), givng themselves more wealth. (How Would A Wealth Tax Work?, Danielle Kurtzleben, NPR (US), December 19, 2019)

Wall Street investors have access to the funds from the US Fed rock bottom interest rate; but Common man does not have access to it.

Table 3 Number of Billionaires in Selected Countries

Chart 4 Dow Jones Industrial Average Historical Chart

Chart 5. Share of Total Wealth in Selected Countries

The following comments about record buybacks by US firms during the last decade in a paper published in January 7, 2020 Harvard Business Review magazine of Harvard University are most appropriate now (Why Stock Buybacks Are Dangerous for the Economy, William Lazonick, Mustafa Erdem Sakinç and Matt Hopkins, Harvard Business Review, January 7, 2020):

Even as the United States continues to experience its longest economic expansion since World War II, concern is growing that soaring corporate debt will make the economy susceptible to a contraction that could get out of control. The root cause of this concern is the trillions of dollars that major U.S. corporations have spent on open-market repurchases — aka “stock buybacks” — since the financial crisis a decade ago. When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.

In 2019 More than half of the stock buybacks are funded by debt, taken at rock bottom interest rate.

They further wrote, “The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies have to invest broadly and deeply in the productive capabilities of their employees in order to remain competitive in global markets. Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity. Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.” (Why Stock Buybacks Are Dangerous for the Economy, William Lazonick, Mustafa Erdem Sakinç and Matt Hopkins, Harvard Business Review, January 7, 2020)

(Source: Why Stock Buybacks Are Dangerous for the Economy, William Lazonick, Mustafa Erdem Sakinç and Matt Hopkins, Harvard Business Review, January 7, 2020)

One point worth noting is that more than half of the stock buybacks are funded by debt (More than Half of All Stock Buybacks are Now Financed by Debt, Larry Light, Fortune, August 20, 2019) due to the cheap loan which firms can get because of the US Fed rock bottom rate. It is similar to mortgaging your house to the hilt, then using it to throw a lavish party.

Nearly all the airlines are in financial crisis. But during the last decade, the six US airlines quoted below spent their 96% of their cash on stock buybacks. Right now, due to pandemic they are begging for money from the Trump administration.

(Source: Opinion: Airlines and Boeing want a bailout — but look how much they’ve spent on stock buybacks, Philip van Doorn, March 22, 2020)

The Trump administration has responded to the airline industry's request and proposed a $50 billion bailout as part of its massive $1 trillion stimulus package. The ultimate goal is to jolt the American economy by flooding it with cash (Airlines are begging for a bailout, but they've used 96% of their cash on buybacks over the past 10 years. It highlights an ongoing controversy over how companies have been spending their money, Joseph Zeballos-Roig, March 17, 2020).

4.     End Game for the Dollar Ponzi Scheme

During World War II, the US enticed all other countries by claiming that it would keep its dollar pegged to gold at the rate of $35 for one ounce of gold. The US asked other countries to use the US dollar as reserve currency and for conducting transactions between countries. This resulted in the 1944 Bretton Woods Accord, signed by 44 countries. As per the agreement, you could have asked the US govt to give you one ounce of gold for $35. But in 1971, Nixon un-pegged the dollar from gold and since then the US has just continued to print dollars to fund its trade and budget deficits. It is worth noting that the US had trade surplus from the World War II till 1971 (Please see Chart 1 in my paper: Part IV – US Bogus Market-Driven Economy and RBI’s Functional Autonomy) and since then it has trade deficit every year. The following statement by the economist Allan H. Meltzer at Carnegie Mellon University sums up how the US has been surviving since 1980s (“U.S. Trade Deficit Hangs In a Delicate Imbalance,” Paul Blustein, Washington Post, November 19, 2005),

“We [United States] get cheap goods in exchange for pieces of paper, which we can print at a great rate.”

Had the dollar not been the global currency, there would not have been the “Reaganomics”, the much-revered economic theory of the Republican party.

To overcome the devastating effects of 2008 Great Recession which caused massive NPAs resulting in insolvency of large banks like Citibank, the US Federal Reserve had to provide $29 trillion (twice of then US GDP) to large banks, to save the US economy from the collapse ($29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient, Working Paper No. 698, James Andrew Felkerson, University of Missouri–Kansas City, December 2011).

During the 2008 financial crisis, Wall Street banks and other big financial institutions were deemed “too big to fail.” The crisis unleashed by the pandemic has broadened that elite status to a significant swath of the American private sector. While the Fed says it does not seek to keep stock prices up, the market has rebounded some 30 percent since the institution began its giant program to pump trillions of dollars into financial markets. It has bought billions of dollars’ worth of U.S. Treasury bonds and government-insured mortgage bonds, keeping the prices of those bonds up and pushing yields, which move in the opposite direction, down. The Fed also announced recently that it would start to buy exchange-traded funds that hold a diversified portfolio representing large parts of the more than $9 trillion corporate bond market and would move on to buying corporate bonds directly “in the near future.” Since such bonds serve as the basis for new borrowings, this lowers the cost of raising money for corporations tapping the bond markets (Too Big to Fail: The Entire Private Sector, Matt Phillips, New York Times, May 19, 2020). In effect, the Fed has turned itself into the world’s largest hedge fund — only unlike a hedge fund, it won’t have to raise its money from investors. Instead it simply prints it. (Socialism for investors, capitalism for everyone else, Steven Pearlstein, Washington Post, April 30, 2020).

Describing the stimulus spent by Emerging Markets the Nobel Prize winner economist Paul Krugman has used the term “Liquidity Trap” spread (Nobel laureate Paul Krugman warns emerging markets are about to lose their best defense against recession, Ben Winck, Business Insider, May 12, 2020) and Lawrence Summers (US Treasury Secretary, 1999–2001 and former president of Harvard University,2001–2006), has termed  the massive US Fed intervention to mitigate the Coronavirus carnage on economy as the “Japanification of the US economy” (Larry Summers Says U.S. Economy Now Confronts ‘Japanification’, Bloomberg, March 12, 2020).

Actually, we are witnessing the end game of the “Dollar Ponzi Scheme.” In the aftermath of 2008-9 Mortgage Crisis, the large bank became too big too fail and the US Fed $29 trillion to support them. Now the Coronavirus carnage on the economy has made large corporations too big to fail, and the US Fed has been spending hundreds of billions of dollars to buy their bonds to support the struggling stock market as without the Fed support there would be complete collapse of the stock market. The 2008 Great Recession was the trailer of the actual film which we are witnessing right now, i.e. a world-wide Great Depression which would surpass even the 1930s Great Depression, ending the US Dollar hegemony in the global economy. The last decade saw the weaponization of dollar against its adversaries, especially against China and Russia on trivial issues, by which the US is going to hasten the demise the its dollar as global currency. In the end we may see emergence of a “true” global currency which will not be dependent on a country’s economy, mostly on the lines of and as proposed by the British team led by Keynes rejected during the 1944 Bretton Woods Accord, which made the US dollar global currency.