The U.S. Federal Reserve (the Fed) has just announced the interest rate policy it will pay for the Treasury bonds issued by the country [1]. These definitions of the Fed are always based on an assessment of the situation and dynamics of the country’s finances and economy and have a great influence on them. At the same time, they also have a great impact on the whole world, since the Fed rate is taken as the basic reference rate that banks around the world charge for their loans.
Alejandro Iturbe
The Fed is the central bank of the United States, responsible for the hoarding of gold and other monetary reserves of that country, for the issuance of dollar notes, and also for the Treasury bonds sold in the United States and worldwide, for which it pays an interest rate. Unlike the central banks of other countries in the world, the Fed is autonomous and can make its own decisions without being subject to the government of the day.
The issuance and sale of Treasury securities is the primary mechanism by which the U.S. finances its gigantic and growing budget deficit. At the same time, they are quasi-money, i.e. they are used in world finance and trade as if they were dollar bills (which is still the world’s reference currency). For this reason, many countries have bought large quantities and today they are an important part of their monetary reserves (this includes world economic powers such as Japan and China). It is one of the mechanisms used by U.S. imperialism to “suck” surplus value from all over the world [2].
Treasury bonds are also bought by private investors, especially from the U.S., as a “safe return” investment, as opposed to other much more volatile investments, such as private company stocks, or cryptocurrencies. When Fed rates are high (attractive), many of these investors choose Treasuries over other options.
The Fed had been pursuing a “high rate” policy (5.5%) by historical standards. It has now announced that it expects at least a slight “cut” in 2024 and that it will continue to monitor the dynamics of the U.S. economy throughout the year in two parameters (GDP evolution and inflation) to determine if it considers it necessary to make further cuts.
At this point, there are two key considerations. The first is that in the “monetarist” vision that has prevailed among bourgeois economists since the 1970s, the management of bank rates has become one of the central instruments of economic policy with which capitalist governments operate on the economic process with different objectives.
The second is the concept of “short cycles” analyzed by Marx when studying the capitalist economy: the very process of capitalist accumulation makes it that each phase of growth that persists for a few years is inevitably followed by a downward phase of similar duration.
Where does this come from?
With this approach, in order to understand the Fed’s interest rate policy, we think it is necessary to briefly consider how this sequence of cycles occurred in recent years in the U.S. At the end of 2019, the U.S. economy already showed that it had “slowed down” and began to enter a downward cycle. This dynamic was confirmed in the first quarter of 2020 (-1.2%) [3]. This was the official start of the “pandemic,” the effects of which led to a historic fall in GDP in the second quarter (almost -10%). In other words, it deepened the effect of a downward phase to the extreme.
Faced with the huge fall in its profits, the U.S. bourgeoisie began to apply the criminal policy of the “new normal”: the gradual reopening of all economic activities, even without having controlled the pandemic [4]. In this way, the downward phase came to an abrupt end and a recovery began from the third quarter of 2020 [5]. This upswing continued in 2021.
This is where the three major staggered financial packages launched by the Joe Biden administration, with immediate, medium and long-term goals totaling several trillion dollars, came into play. At the time, an article in Correo Internacional offered the analysis that “Biden is combining a large injection of credit with deficit-financed government spending, both for investment and direct payments to businesses and households”[6].
Despite the impact of these packages on the U.S. economy, we characterized the global recovery as “anemic and troubled” [7].
The Fed’s anti-inflation policy
One of the existing problems has been high inflation during this recovery. In 2021, annual inflation was 7%, the highest since 1982. Something that “had begun to become a major concern for Americans, who were beginning to feel that the rising cost of living was offsetting the benefits of the economy’s strong recovery.”[8] At this point, the Fed began raising interest rates in a monetary attempt to keep prices low.
The Fed then began raising rates in a monetarist attempt to “dry up the market” (take money out of circulation). The goal of lowering inflation has been achieved: by 2023 it will be 3.4% per year [9]. However, this is only a partial success, since the Fed’s idea is to reach 2% per year. At the same time, although it has succeeded in reducing inflation, it has not in the least reversed the price increases of the last four years and their strong negative impact on the standard of living of workers and the masses.
On the other hand, this policy of “drying up the market” has other consequences, because it absorbs money that does not go to other investments, such as the shares of private companies or the numerous startups dedicated to technology and its application that had emerged in recent years.
Many of these startups went into crisis and this affected some of the banks whose business was focused on them, leading them to bankruptcy, as was the case of Silicon Valley Bank in California, Signature Bank (focused on cryptocurrencies) and First Republic Bank (based in San Francisco). This banking crisis threatened to spread across the country and, for different reasons, had its own expression in Europe [10].
The intervention of the Biden administration (which supported the payment of deposits) and the purchase of First Republic Bank by JP Morgan contained the spread of the banking crisis and prevented a situation like that caused by the bankruptcy of Lehman Brothers in 2007/2008. But the situation could reopen if the U.S. economy goes into open recession.
“Soft Landing” vs. Recession
The effects of the Biden mega-packages have already been largely “eaten up.” They achieved their most immediate objectives: to alleviate somewhat the very harsh economic-social situation of the workers and masses during the pandemic and to provide some support for the recovery phase. But they did not achieve another of their objectives: to promote a stronger and sustained wave of capitalist investment in the productive sectors (the only ones that create new value).
According to the White House website “Investing in America,” private investment in industrial production during Biden’s presidency amounts to $503 billion (a historically low figure), of which $231 billion (46%) is in semiconductor production. One of the consequences of this is that new job creation is low and well below government projections. In other words, the U.S. economy is “running out of gas.”
Let’s look at some GDP dynamics data: in 2021, it grew 5.8%; in 2022, 1.9%; and in 2023, 2.4% (some reversal of the declining growth trend). What will happen in 2024? Forecasts are mixed. The Fed and other economic analysts predict 2.4% growth in 2024 [11]. Based on this forecast, they characterize it as a “soft landing;” that is, a slowing of momentum, albeit slow and gradual. This is why the Fed is so conservative in its interest rate policy (although it includes a “wait and see” warning), which means that for the time being it continues to favor its policy of lowering inflation.
Other analyses are more pessimistic, such as that of the Conference Board (a think tank composed of senior executives of major industrial companies and other “thinkers”), which forecasts growth of only 0.8% in 2024. Among other things, this analysis considers that although consumer spending remains high (the main factor that has sustained the recovery given the lack of productive investment), it is “unsustainable given the scarcity of disposable income and the rapid depletion of savings” [12]. In other words, he foresees a much faster “landing.” This puts him in the camp of those who are calling for a more aggressive policy of interest rate cuts by the Fed in order to “loosen the money supply” and thus mitigate the brakes on the economy.
From our point of view, the various elements that combine in reality (low productive investment by the bourgeoisie, low job creation, declining corporate profits at the economy-wide level, as pointed out by the Marxist economist Michael Roberts, and the exhaustion of the strength of consumption) indicate that we are at the end of the upswing and that the most likely scenario is that a recession is approaching.
At the same time, if we analyze the international economic context, major powers such as the United Kingdom, Germany, and even Japan are already in recession. China, the world’s second largest economy, is also facing major problems, especially in its real estate sector [13].
Military and Semiconductor Investments
Within this framework, there are two sectors that receive money from the Biden administration. One is the so-called military-industrial complex, which receives part of the $760 billion “military spending” included in the annual budget, and to which Biden wanted to add $105 billion in 2023 with his “Critical National Security Funding” bill sent to Congress (which added $105 billion to the $760 billion already included in the annual budget). Although the bill is “blocked” by the Republicans for the time being, it is part of the policy of the U.S. imperialism of “rearmament” and renewal of its military capacity on the basis of the war in Ukraine and the hypothesis of a military conflict with China over Taiwan. In this framework, the different branches of the military-industrial complex are working at full capacity.
The second sector is the production of advanced microchips used in mobile phones and high-end computers. In this area, U.S. industry is currently dependent on chips made by Taiwan’s TSMC and Korea’s Samsung, which dominate the world market. Biden wants to reduce this dependence and has begun to inject funds to boost research, development, and manufacturing of chips in the U.S. with the installation of new factories.
To this end, he passed the “Chip Act” in 2023, which injected $50 billion in direct funding into this sector (part of a total package of $282 billion to be completed in the following years) [14]. The biggest beneficiaries have been companies such as NVidia and the Intel-IBM block, but as we have seen, it is in this sector as a whole that the largest productive investments are being made.
This sector is currently the most dynamic in the economy. However, it should be noted that the relationship between the volume of investment and the rate of job creation is very low. Secondly, the construction of new manufacturing plants aggravates the existing water crisis in the regions where they are installed (as in the case of Phoenix, Arizona). In reality, there is a deeper “logistical crisis” on the water issue, and this fact casts doubt on a meaningful implementation of the Chip Act. Thirdly, it is not the engine that can overcome the “crisis of profitability” of the national economy as a whole and thus open a strong wave of investment by the bourgeoisie.
An important fact is that in the automotive industry, the country is lagging behind in the fierce world competition in the market of electric vehicles, and the necessary transition for a reconversion of this industry to increase its competitiveness is “cooling off” [15].
The class struggle
We would like to conclude this article with a brief reference to the processes and dynamics of the class struggle, especially the strikes over wages and contract conditions, which are deeply intertwined with the economic situation and dynamics.
The U.S. working class has been under constant attack on both fronts since the 1980s, when the Reagan administration crushed the air traffic controllers’ strike. In the case of industrial workers, this has been compounded by the impact of the transformation of the U.S. economy, which has become increasingly focused on finance and services and less “productive.” The increasing use of technology has also had an impact.
This meant the closing of many plants and the downsizing of others, processes in which companies were able to impose new working arrangements that were much more detrimental to workers. An example of this was the “bailout” of General Motors in 2009, a model that was later applied to many other industrial companies. At the same time, the number of service jobs grew, with much lower wages and working conditions.
The pandemic made this picture worse. When it “ended,” workers understood that they were not being rewarded for their sacrifices and began to fight back increasingly, in partial but significant waves of strikes. An important element is that the industrial workers (who had been absent from the scene for many years) reappeared in them.
This was the case at the end of 2021 [16]. In 2022, according to the Bureau of Labor Statistics, there was a 50% increase in “large strikes” (each involving more than 1,000 workers) compared to the previous two years. That year, the education, health care and service sectors were clearly dominant. In 2023, the center of the scene was occupied by the strike of the auto workers, which put “on the table” a demand of the Transitional Program of the Fourth International (the sliding scale of wages )[17]. The result of this strike was considered a triumph by the workers [18].
This opens the possibility of a new partial wave of strikes. On the one hand, it is necessary to see what impact the “demonstration effect” of the UAW result has had. On the other hand, we believe that the unions and their influence are growing after decades of decline and shrinkage (either by increasing the membership of existing unions or by trying to create new unions, as in the case of Amazon and other companies).
The U.S. working class is increasingly realizing that “concessions” only lead backwards, that it is necessary to fight for some improvement, and is beginning to see unions as a tool to do so. According to a Reuters poll, 58% of the population supported the UAW strike. At the same time, more and more young workers have sought employment in places with unions or are trying to organize (such as Amazon). We believe this is a symptom that may indicate a greater willingness to fight. Reality will show whether this is the case or not. The dynamics of the class struggle in the U.S. and the results of the struggles will obviously have an impact on the internal situation of the country. Because of the weight of the USA, they will also have an impact on the class struggle in the whole world [19].
Notes:
[1] The Fed confirms its intention to lower interest rates, although it extends the conditions (ambito.com).
[2] On this subject, we recommend reading “Chapter 8: USA, epicenter of the current crisis” in Alejandro Iturbe’s book O sistema financeiro e crise da economia mundial, Editora Sundermann, Brazil, 2009.
[3] https://cincodias.elpais.com/cincodias/2020/04/29/economia/1588166272_118727.html
[4] https://litci.org/es/la-verdadera-cara-de-la-nueva-normalidad/
[5] https://litci.org/es/hacia-donde-va-la-economia-mundial/
[6] “Keynesianismo imperialista en tiempos de pandemia” by Orlando Torres, in Correo Internacional n.° 25 (April 2021), available at https://litci.org/es/especialescorreo/
[7] https://litci.org/es/67115-2/
[8] https://www.lanacion.com.ar/estados-unidos/la-inflacion-en-estados-unidos-en-2021-alcanzo-su-maximo-en-39-anos-nid12012022/#:~:text=Estados%20Unidos%20cerr%C3%B3%202021%20con,en%20el%20costo%20de%20vida
[9] https://elpais.com/economia/2024-01-11/estados-unidos-cierra-2023-con-la-inflacion-en-el-34-tras-repuntar-en-diciembre.html
[10] https://litci.org/es/las-raices-profundas-de-la-crisis-bancaria-internacional/
[11] https://www.eleconomista.com.mx/economia/SP-proyecta-crecimiento-del-PIB-de-Estados-Unidos-de-2.4-para-2024-20240221-0089.html
[12] https://www.conference-board.org/about/us#:~:text=We%20connect%20senior%20executives%20across%20the%20board,profit%20our%20work%20is%20trusted.
[13] https://www.infobae.com/america/mundo/2024/01/02/la-crisis-de-la-eco
[14] Five keys to the U.S. chip bill – The New York Times (nytimes.com)
[15] https://www.infobae.com/wapo/2023/12/27/la-transicion-a-los-vehiculos-electricos-se-enfria-cae-la-demanda-y-se-ralentiza-la-produccion/
[16] https://litci.org/es/67597-2/
[17] https://litci.org/es/eeuu-solidaridad-con-los-huelguistas-de-la-uaw/
[18] https://elpais.com/economia/2023-10-31/los-trabajadores-ganan-la-huelga-del-motor-de-ee-uu-al-lograr-fuertes-subidas-de-sueldos-y-conquistas-laborales.html
[19] https://litci.org/es/eeuu-un-levantamiento-de-la-clase-obrera-norteamericana-tiene-un-reflejo-enorme-sobre-el-conjunto-de-la-clase-trabajadora-mundial/
