By Paul Craig Roberts
October 30, 2012 "Information
- Since mid-2009 the US has been enjoying a virtual
recovery courtesy of a rigged inflation measure that understates
inflation. The financial Presstitutes spoon out the government’s
propaganda that prices are rising less than 2%. But anyone who
purchases food, fuel, medical care or anything else knows that
low inflation is no more real that Saddam Hussein’s weapons of
mass destruction or Gadhafi’s alleged attacks on Libyan
protesters or Iran’s nuclear weapons. Everything is a lie to
serve the power-brokers.
During the Clinton administration, Republican economists pushed
through a change in the way the CPI is measured in order to save
money by depriving Social Security retirees of their
cost-of-living adjustment. Previously, the CPI measured the
change in the cost of a constant standard of living. The new
measure assumes that consumers adjust to price increases by
lowering their standard of living by substituting lower quality,
lower priced items. If the price, for example, of New York strip
steak goes up, consumers are assumed to substitute the lower
quality round steak. In other words, the new measure of
inflation keeps inflation down by reflecting a lowered standard
Statistician John Williams (shadowstats.com),
who closely follows the collecting and reporting of official US
economic statistics, reports that consumer inflation, as
measured by the 1990 official government methodology has been
running at about 5%. If the 1980 official methodology for
measuring the CPI is used, John Williams reports that the
current rate of US inflation is about 9%.
The 9% figure is more consistent with people’s experience in
Officially the recession that began in 2007 ended in June 2009
after 18 months, making the Bush Recession the longest recession
since World War II. However, John Williams says that the
recession has not ended. He says that only the GDP reporting,
distorted by an erroneous measurement of inflation, shows a
recovery. Other, more reliable measures of economic activity,
show no recovery.
Williams reports that the economy began turning down in 2006,
falling lower in 2008 and 2009, and bottom-bouncing ever since.
Not only is there no sign of any recovery, but “the economic
downturn now is intensifying once again.” The absence of an
economic recovery “is evident in the [official] reporting of
nearly all major economic series. Not one of these series shows
a pattern of activity that confirms the recovery [shown] in the
Williams concludes that “the official recovery simply is a
statistical illusion created by the government’s use of
understated inflation in deflating the GDP.” In other words, the
reported gains in GDP are accounted for by price increases, not
increases in real output.
The result of the US government’s economic deception is the same
as the deception Washington has used to start wars all over the
Middle East. The government propaganda produces a make-believe
virtual reality that bears no relationship to real reality. In
history there have been many governments who have prevailed by
deceiving the people, but Washington has moved this success to a
new peak. As long as Americans believe anything Washington says,
they are doomed.
It is easy to see why there is no economic recovery and cannot
be an economic recovery. Look at the chart below (courtesy of
Real median household income at the end of 2011 is back where it
was in 1967-68. Moreover, Williams has deflated household income
to get its real value by using the official inflation measure,
which substantially understates inflation. If Williams had used
the 1990 or 1980 official government methodology for calculating
the consumer price index, the real median incomes of households
would show a larger decline.
Moreover, the low 2011 real median household income is the
summation, in most cases, of two household earners, whereas in
1967-68 one earner could produce the same real income. As Nobel
economist Gary Becker, my former colleague as Business Week
columnist, pointed out, when both husband and wife have to work
in order to maintain the same purchasing power, household income
from the wife’s in-kind household services is eliminated.
Therefore, the monetary measure of the dual household income
overstates income, because it is not adjusted for the lost
benefits formerly provided by the wife who at home managed the
Americans are far more oppressed by the power brokers in
Washington than statistics display. Moreover, the young are born
into the oppressive, exploitative American system and do not
know any different. They are fed by the Presstitute media with
endless propaganda about how fortunate they are and how
indispensable their wonderful country is. Americans are kept in
a constant state of amusement, and many never grasp the loss of
their civil liberties, job and career opportunities, and respect
that the US won during the decades-long cold war with Soviet
On September 13, Federal Reserve Chairman Ben “Helicopter”
Bernanke announced Quantitative Easing 3. Bernanke said that the
recovery is weak and needs more Fed stimulus. He said the Fed
will purchase $40 billion of mortgage bonds per month in order
to drive interest rates further below the rate of inflation and
help to sell more houses.
But how do you sell houses to households who are getting by with
1967-68 levels of real income and who have absolutely no job
security? Their company can be taken over and offshored tomorrow
or they can be replaced by foreign workers on H-1B visas.
Housing prices have dropped, but not to 1967-68 levels.
Bernanke’s announcement that the Fed’s purchase of mortgage
bonds is to spur housing and the economy is disinformation.
Bernanke is purchasing the bonds in order to boost the values of
the derivatives and debt instruments in the banks’ portfolios.
Lower interest rates raise the value of the debt instruments on
the banks’ balance sheets. By depriving American savers of a
real interest rate on their savings, Bernanke makes the busted
banks look solvent.
This is what is happening in “freedom and democracy” America.
The vast majority of Americans, especially the retired, are
forced to consume their savings and draw down their capital
because they can get no real interest on their savings. The
beneficiaries are the banksters, who can borrow at near zero
interest rates, charge consumers 16% on their credit cards, and
use the Federal Reserve’s largess to speculate on interest rate
swaps and credit default swaps. The American taxpayers hold the
bag for the banksters’ uncovered gambles.
Would you not gamble if the American taxpayers had to cover your
bets, but your winnings were yours alone?
The future of the American political order is in doubt. The Bush
and Obama regimes have so badly abused the Constitution and
statutory law, that the America that Ronald Reagan left to us no
longer exists. America is on the path to collapse or tyranny.
Suppose that a miracle produces an economic recovery. What
becomes of the enormous excess bank reserves that the Federal
Reserve has provided the banks?
If these bank reserves are used for expanding loans, the money
supply will outstrip the production of goods and services, and
inflation will rise.
If the Fed tries to take the excess reserves out of the banking
system by selling bonds, interest rates will rise, thus
destroying the wealth of bond holders and draining liquidity
from the stock market. In other words, another depression that
wipes out the remaining American wealth.
The Federal Reserve’s announcement of QE3 shows that the Fed
will continue to create new money in order to protect the values
of the insolvent banks’ questionable assets. The Federal Reserve
represents the banksters, not the American public. Like every
other American government institution, the Federal Reserve is
far removed from concerns about American citizens.
In my opinion, the Federal Reserve’s purchase of bonds in order
to drive down interest rates has produced a bond market bubble
that is larger than the real estate and derivative bubbles.
Economically, it is nonsensical for a bond to carry a negative
real interest rate, especially when the government issuing the
bond is running large budget deficits that it seems unable to
reduce and when the central bank is monetizing the debt.
The bubble has been protected by the euro “crisis,” which
possibly is more of a virtual crisis than a real one. The euro
crisis has caused money to seek refuge in dollars, thus
supporting the dollar’s value even while the Federal Reserve
prints money with which to purchase the never-ending flow of the
governments’ bonds to finance trillion dollar plus annual budget
deficits--about 5 times the “Reagan deficits” that Wall Street
alleged would wreck the US economy.
Indeed, the US dollar’s exchange value is itself a bubble
waiting to pop. The sharp rise in the dollar price of gold and
silver since 2003 indicates a flight from the US dollar. (The
chart is courtesy of John Williams, shadowstats.com.)
The bond market bubble will pop if the dollar bubble pops. The
Federal Reserve can sustain the bond market bubble by purchasing
bonds, and there are no limits on the Federal Reserve’s ability
to purchase bonds. However, the endless monetization of debt,
even if the new money is stuck in the banks and does not find
its way into the economy, can spook foreign holders of
Foreign central banks can decide that they want to hold fewer
dollars and more precious metals as their reserves. Other
countries, sensing the US dollar’s demise,
are organizing to conduct their trade without the use of the
world’s reserve currency. Brazil, Russia, India, China, and
South Africa intend to conduct their trade with one another in
their own currencies. China and Japan have also negotiated to
settle their trade balances with one another in their own
These agreements substantially reduce the use of the US dollar
in international trade and, thus, the demand for dollars. When
demand falls, so does price, unless the supply shrinks. But the
Federal Reserve has announced, essentially, unlimited supply of
US dollars. So we are faced with a paradox. The US dollar is
supposed to remain valuable despite its enormous increase in
In addition, China, America’s largest creditor and in the past a
reliable purchaser of US Treasury bonds, holds some two trillion
in dollar-denominated assets, primarily Treasury bonds. How is
Washington treating its largest foreign creditor? Not with
appreciation or deference. Washington is surrounding China with
naval and air bases, interfering in China’s disputes with other
countries, and bringing contrived actions against China in the
World Trade Organization. Washington claims that US corporations
are deserting the US not because of the lower cost of labor in
China, but because of Chinese “subsidies” to the relocated US
In my April 30 column, “Brewing
a Conflict with China,”
I wrote that Washington would like to substitute a cold war with
China for the hot wars in the Middle East. The problem with the
hot wars is the loss of superpower face from Washington’s
inability to prevail after eleven years, and although the hot
wars are profitable for the military/security complex, the wars
don’t generate the level of profits that would flow from a
high-tech arms race with China. Moreover, Washington believes
that diverting Chinese investment from the economy into a
military buildup would slow the rate at which the Chinese
economy is overtaking the US economy.
What if instead of taking the bait from Washington, China
targets Washington’s Archilles heel--the dollar’s role as
reserve currency--and decides it is cheaper to dump one trillion
dollars of US Treasury debt on the bond market than to commit to
a 30 year arms race? To keep the price of Treasuries from
collapsing, the Federal Reserve could print the money to buy the
bonds. But if China then dumps the printed one trillion dollars
in the foreign exchange markets, Washington cannot print euros,
British pounds, Russian rubles, Swiss francs, and other
currencies in order to buy up the dollars.
Frantic, Washington would try to arrange currency swaps with
foreign countries in order to acquire the foreign exchange with
which to buy up the dollars that, otherwise, will drive down the
dollar exchange rate and destroy the Federal Reserve’s control
over interest rates.
But if the Chinese don’t want the dollars, will other countries
want to swap their currencies for the abandoned US dollar?
Some of Washington’s puppet states will comply, but the wider
world will rejoice in the termination of Washington’s financial
hegemony and refuse the offer.
Sooner or later the dollar will collapse from Washington’s abuse
of the dollar’s role as reserve currency, and the dollar will
lose its “safe haven” status. US inflation will rise, and US
political stability, along with America’s hegemonic power, will
The rest of the world will sigh with relief. And China will have
defeated the superpower without an arms race or firing a shot.
Craig Roberts was Assistant Secretary of the Treasury for
Economic Policy and associate editor of the Wall Street Journal.
He was columnist for Business Week, Scripps Howard News Service,
and Creators Syndicate. He has had many university appointments.
His internet columns have attracted a worldwide following.
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