[OccupyCU] Latin America’s ‘Made in USA’ 2014 Recession

[David Johnson via OccupyCU]

Green Shadow Cabinet <http://greenshadowcabinet.us/>




  Latin America’s ‘Made in USA’ 2014 Recession

October 7, 2014
Jack Rasmus, Federal Reserve Chair, Green Party Shadow Cabinet
<http://greenshadowcabinet.us/member-profile/7569>

/teleSUR English/


*/The USA is taking advantage of the emerging recessions in Latin 
America to put additional economic pressure on two of the region’s most 
important economies: Argentina and Venezuela./*

Three major economies of Latin America—Brazil, Argentina, and 
Venezuela—entered recession in 2014. And in all three cases their 
recessions may be subtitled, ‘Made in the USA’.

After growing at 5% to 9% in annual GDP rates between 2010-2012, in 2013 
all of the ‘big three’ economies of South America began to slow 
significantly. Both Brazil and Venezuela GDP grew at only around 1%-2% 
in 2013, while Argentina’s economy slowed from 9% in 2010 to 4%.  
Economic growth in Latin America’s other major economy, Mexico, slowed 
similarly—from 5.5% in 2010 to only 1% last year.

After slowing to a crawl in 2013, the bottom then dropped out in 2014.  
Both Argentina and Venezuela economies are projected to decline -2% to 
-3% this year. And with negative economic growth both quarters this past 
January to June, Brazil’s economy is on track to decline -0.5% to -1.0%  
in 2014.  Elsewhere, Mexico this year continues to stagnant barely above 
recession levels, while other Caribbean and South American economies, 
like Peru, also now hover around zero growth.

So what’s behind the new recession in Latin America—in particular what’s 
driving the big 3 economies of Brazil, Argentina and Venezuela into 
recession?   What happened to reverse their 5% to 9% GDP growth rates of 
2010-2012 so dramatically by 2013?  And will the forces behind that 
reversal continue and perhaps accelerate in 2015, driving these Latin 
American economies further and deeper into recession?

To answer these key questions it is necessary to step back a few years 
to the period immediately following the global economic crash and crisis 
of 2008-09.

*Global Force #1: The $20 Trillion Global Liquidity Injection*

The immediate response to the global crash by the advanced economies 
(AEs)—especially the USA, UK, and to a lesser extent the Eurozone—was a 
massive bailout of their banking systems.  The USA central bank, the 
Federal Reserve (Fed)—with the United Kingdom’s central bank, the Bank 
of England (BoE) in close tow—have provided a massive, multi-trillion 
dollar injection of money capital (liquidity) to prevent the near total 
collapse of the global capitalist banking system.

This bailout and money injection has assumed two forms:  zero interest 
rates (ZIRP) to the private banking system and a policy called 
‘quantitative easing’ (QE), whereby the central banks essentially 
printed money and directly purchased trillions of dollars of toxic, 
virtually worthless bad assets held in the wake of the crash by private 
banks, shadow banks, and wealthy ‘ultra high net worth’ investors.

In the USA, this money injection by the US Fed alone would amount to 
more than $15 trillion. In the United Kingdom, another equivalent $2-$3 
trillion. And in the Eurozone and Japan by 2014 an additional minimum $2 
trillion more.

Monetary policy (QE, ZIRP) became the primary economic recovery policy 
in the  AEs. Fiscal policy in the form of government spending and 
investment played, at best, only a token role (in USA, UK), a negative 
role (Europe), or virtually no role at all (Japan).

The USA economy introduced a token 5% of GDP fiscal stimulus in 2009-10, 
most of which were tax cuts for businesses and temporary subsidies to 
the US States for one year.  The Obama administration’s approximate $800 
billion fiscal stimulus in 2009-10 was then retracted in 2011 by a $1 
trillion government spending cut. More cuts followed.  A similar process 
occurred in the UK. The Eurozone’s followed ‘austerity’ fiscal policies, 
with not even a token fiscal stimulus, and deep reductions in government 
spending.

*Global Force #2: China’s 15% Fiscal Stimulus*

In contrast to the AE capitalist economies’ almost total reliance on 
monetary injections, China responded to the 2008-09 crash with a massive 
fiscal spending and direct government investment program amounting to 
approximately 15% of its GDP at the time—i.e. three times the size of 
the USA’s initial fiscal stimulus. The composition of China’s stimulus 
also differed. It was mostly direct government investment, whereas the 
USA’s was mostly business tax cuts and subsidies to States—neither of 
which generated much in terms of jobs and working class wage growth.

China’s economy recovered quickly and strongly in the wake of 2008-09, 
growing in the 10%-14% range.  In contrast, with an opposite emphasis 
putting their banks and investors first in line for bailout, the 
capitalist AEs recovered only slowly, at half the normal historical 
growth rates following recession, or not at all—as in the case of the 
Eurozone and Japan which experienced ‘double dip’ and ‘triple dip’ 
recessions, respectively, after 2010.

This dichotomy in economic recovery policies—i.e. China focusing on 
fiscal solutions and direct government investment vs. the AEs focusing 
on massive money injections and token or negative government 
investment—is crucial to understanding the trajectory of the Latin 
American economies after 2010 and their current descent into 
recession today.

*2010-12:  Converging Forces Benefit Latin America*

With weak or no recovery in their ‘real’ economies, the AE central 
banks’ massive money injections resulted in much of that money capital 
‘flowing out’ of the AE economies and into China and the emerging market 
economies (EMEs)—including Latin America.

Some of the money capital inflows to Latin America went into financial 
market speculation in the stock, bonds, derivatives, real estate, 
currency markets in Latin America. But as China growth accelerated in 
2010 and after, it required more natural resources, more commodities, 
and more semi-finished goods.  Latin America could, and did, provide 
those to China. So money capital also flowed into real investment in 
Latin America—in expanding commodities and resources production to meet 
China demand, into semi-finished goods to be exported to China, and into 
further developing Latin American infrastructure. This real output 
growth in turn further boosted financial asset prices and speculation in 
Latin American financial asset markets.

So two global forces converged in 2010 to the benefit of Latin America:  
surging China demand and simultaneous AE central banks’ massive money 
injections that mostly ‘flowed out’ of the AE economies into the EMEs, 
including Latin America, that funded real investment to increase 
production to satisfy that China demand.

With their own AE real economies languishing, stagnating, and slipping 
in and out of recessions, AE private bankers borrowed the trillions of 
dollars of ‘free money’ from their central banks and invested that money 
capital directly offshore themselves to exploit the potential for higher 
rates of return in China, the EME’s and Latin America; alternatively, 
they loaned the free money from their AE central banks in turn to shadow 
banks, high net worth investors, and US multinational corporations that 
did the same.

As the Bank of International Settlements (BIS)—i.e. the bank of central 
banks—in Geneva noted in its most recent 2014 annual report, that 
hundreds of billions of dollars annually flowed into Latin America 
between 2010-2013—between $500 billion to perhaps $1 trillion—providing 
credit for expansion. Much of that massive money capital inflow now 
exists as debt on the balance sheets of Latin American business 
borrowers, debt that will have to be repaid in coming years even as the 
region’s economies now sink into recession.  So the credit inflows and 
corresponding debt build-up in Latin America is primarily private 
business sector debt—not consumer or even government debt.

The money inflows expanded Latin American economic infrastructure, 
agriculture output and manufacturing production needed to satisfy the 
China demand. But as other EMEs grew along with China (BRICS, G-12, 
Australia, etc.) it generated another layer of global demand for Latin 
American goods and services.   Latin American stock and other financial 
markets boomed even more along with rising production output, providing 
still more financial asset speculation. Shadow bankers—i.e. hedge funds, 
private equity firms, insurance and investment bankers—circled and 
swooped into the region. The massive money inflows also drove up the 
currency and real estate values in Latin American countries, offering 
yet another lucrative financial asset speculation opportunity.

*2013-14: Forces Diverge & Latin American Recessions*

In early 2013 the above converging forces began to shift and reverse, 
setting in motion the weakening of Latin American economies today, in 
2014. China’s rapid economic growth began to significantly slow by late 
2012, while simultaneously, in early 2013, the USA Fed central bank 
announced plans to reduce its massive money capital injections by 
discontinuing QE and thereafter by raising interest rates.

It is important to note, however, that the common source behind both 
China’s slowing and the Fed’s shift to discontinue QE and raise rates is 
the destabilizing behavior of the global finance capital elite—at the 
forefront of which have been the ultra high net worth financial 
speculators and their shadow banks, together sometimes referred to as 
the ‘vultures’, if one prefers.

Here’s the connection in brief:

The massive money injections by AE central bankers since 2009 have 
resulted in creating global financial asset bubbles in stocks, junk 
bonds, foreign exchange, Euro periphery government bonds, and divers 
other forms of financial asset speculation.  By 2013, with bankers and 
investors more than bailed out by means of the, prior $20 trillion AE 
central banks’ money injections, AE central bankers in the USA-UK 
announced a shift in policy in the spring of 2013—i.e. to discontinue QE 
and then to raise interest rates to ‘recall’ some of the prior massive 
trillions of dollars of liquidity injection—in order to cool down some 
of the financial bubbles emerging.

In early 2013, the US Federal Reserve initially announced it would start 
reducing QE. The immediate result was a crisis in EME financial markets, 
including Latin America’s.  In expectation of no QE and higher rates 
(and in turn a rising US dollar), money began flowing out of Latin 
America back to the USA and other AEs—into USA stock and junk bond 
markets, into the UK generating a London area construction sector 
bubble, and into Southern Eurozone sovereign bonds.

That prospect of accelerating money capital outflow precipitated Latin 
American currency declines, an initial round of capital flight from the 
region, a potential slowing of foreign direct investment (FDI) to the 
region, and rising inflation as the cost of imports accelerated due to 
the currency declines.  Stock markets swooned in turn in response to all 
this.   A number of Latin American governments responded in turn by 
raising their own domestic interest rates, in an effort to stem their 
currencies’ fall, re-attract the foreign money capital, and halt the 
stock market collapses. Their rise in rates only served to slow their 
economies further.

In recognition of the growing crisis in the region, the USA Federal 
Reserve quickly reversed itself and declared QE taper was not on its 
immediate agenda. But that declared phony ‘halt’ was only temporary. The 
Fed postponed action only until the USA resolved its October 2013 
government shutdown confrontation between parties in Congress. Once 
over, the Fed again began reducing QE and has done so every month, 
ending altogether by December 2014. However, of greater potential impact 
for Latin America is the growing drift of the US Fed toward raising US 
interest rates.

With no QE to fund money capital inflows to Latin America, and the 
prospect of higher US interest rates that would recall even more money 
capital back to the USA and AEs, problems of capital flight, declining 
currencies, rising import inflation, slowing FDI, as well as rising 
rates in Latin American economies returned even stronger by year end 
2013. By 2014 the problems were of sufficient severity to push the 
region’s main economies into recession.

Simultaneous with the money capital reversal engineered by the US Fed 
and AE central banks, China also began slowing its economy in the spring 
of 2013 in an attempt also to ‘tame’ its own shadow bankers and 
financial speculators—aka ‘vulture’ hedge funds, private equity, 
etc.—who were creating destabilizing bubbles in its own currency, in 
regional construction, and in local government investment markets.

In May-June 2013 China reduced spending and its money supply growth to 
cool off its economy and check the speculative bubbles. But the policies 
slowed its real economy more than tamed the speculators.  So it 
initially backed off, like the Fed had, in the summer of 2013.  It 
introduced a mini-stimulus thereafter to restore growth.  This 
stimulus—along with the Fed’s temporary reversal of QE in the summer of 
2013—had the effect of temporarily cushioning Latin America’s drift 
toward recession in mid-2013. But China’s mini-stimulus in summer 2013 
was not enough, and the China economy subsequently slowed further again. 
Once growing 10%-14% in 2010-12, China’s economy is now growing by less 
than 7% by most independent estimates. That slowing has in turn 
significantly reduced China demand for Latin American resources, 
commodities and semi-finished goods.

The combination of China demand slowing and AE money in-flows about to 
reverse precipitated once again by late 2013 a slowing of Latin American 
economic growth, and exacerbated related trends of declining currency 
values, declining stock values, capital flight, slowing FDI into the 
region, and rising import costs from the currency declines that are 
generating inflation as well.

Latin America’s recession today is thus largely the consequence of USA 
monetary policy shifts and slowing China growth and demand. But beneath 
that surface, the even more fundamental force behind both these apparent 
trends is the growing desperate efforts of global governments, in both 
the AEs and China, to somehow check the destabilizing behavior of global 
finance capitalists and their speculative investing in financial asset 
markets globally that threatens yet another global financial market 
implosion in the near future.

*A Fundamental Contradiction*

The essential point of both the China and USA Federal Reserve policy 
reversals of 2013-14—policy reversals that are now driving Latin America 
into recession—is that both policy shifts have their fundamental origins 
in the financial destabilization behavior of the global finance capital 
elite. The folks that gave us the 2008-09 financial crash and are in the 
process of creating yet another.  The shift by the US Fed is clearly a 
response to try to head off further financial asset bubbles that have 
been building.  Not as obvious is that China’s economic slowdown is also 
being driven, in significant part, by its efforts to reduce the 
influence of global financial speculators that have been destabilizing 
its foreign currency and local real estate markets where bubbles have 
been growing as well.

Indirectly then, the vulture finance capitalists, the global finance 
capital elite, the shadow banks and their ‘ultra high net worth’ 
mega-wealthy investors, are responsible for the slowing of Latin 
American economies in 2014.

A key contradiction in the global economy today is that, as AE central 
banks reduce money injections to slow financial bubbles, and thus avoid 
another financial crash that would drive the global economy into another 
depression, by raising interest rates in a global economy already 
slowing everywhere AE central bankers may in fact prematurely 
precipitate just the same outcome.

*A Political Postscript*

It should also be noted that certain recent USA government policies have 
also been exacerbating Latin America’s emerging recession. The USA is 
taking advantage of the emerging recessions in Latin America to put 
additional economic pressure on two of the region’s most important 
economies: Argentina and Venezuela. This further destabilization 
suggests that the USA may be ‘turning’ again toward a focus on Latin 
America in an effort to reassert its hegemony in the region and to roll 
back the progressive developments and governments there that have arisen 
in recent years. But how the USA is now attacking both Argentina and 
Venezuela—i.e. by defending the vulture capitalist hedge fund 
billionaires in the case of Argentina debt payments and by working with 
US multinational corporations to artificially create a dollar shortage 
and runaway inflation in the case of Venezuela in a USA effort to still 
further destabilize the slowing economies of both countries—is the 
subject of a subsequent essay and analysis.

/~ //Dr. Jack Rasmus/ 
<http://greenshadowcabinet.us/member-profile/7569>/ serves as Chair of 
the Federal Reserve on the Economy Branch of the Green Shadow Cabinet./

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