‘Grand Game’ is a money multiplying game on the American television game show ‘The Price is Right’. It involves stakes of $10,000 a day. It is gambling — the oldest game known to mankind. There is another money multiplying game, but a modern one. This involves millions of US households as victims and trillions of dollars as stakes. That is the US Fed policy-run game of first multiplying actual money several-fold as notional wealth, and again turning the multiplied notional money into actual by making it collateral for the actual but borrowed money.
There is another aspect to this new game. In the Grand Game, the player who stakes his money may win a fortune or lose his stake. But, in the Fed’s money multiplying game, the match is already fixed. The player that stakes its money, the US household, is destined to lose, and someone else — the US corporate, that is already chosen to win — is certain to win.
This dangerous game played in the US is being offered to all other nations as part of global financial integration and as a universal model. The unfolding story is about how the Fed policy game that bankrupts households and enriches corporates is passed off as the sophisticated end of modern economics.
In the last decade and more, particularly with the advent of globalisation in early 1990s, the US Fed seems to have chosen corporates as the principal vehicle to handle US household money. The economic rationale to bank on US corporates seems to be this: that money — read wealth — cannot be multiplied by households the way corporates can.
Money multipliers
Normal householders are just savers, not multipliers, of money. But corporates know how to multiply money. This money multiplying game policy-hosted by the US Fed is very different from the actual, not notional, money multiplier idea expounded by John Maynard Keynes.
The short story of the new game begins now.
Let’s assume that the Fed interest rate is 10 per cent and at that rate the US households have the potential to save $400 billion. This $400 billion is no imaginary number. Had the US households’ share of savings continued to be 80 per cent of the total, as in early 1980s, in the year 2006 it would have been $400 billion at the Fed rate of 10 per cent as in 1980s. US families would have kept most of their $400 billions savings in safe and fixed rated investments.
The next act of the story begins now. The Fed rate cuts the interest rate to levels of, say, 1 per cent or 2 per cent, as it was from 2002 to 2004 — that is intended repel savers and invite spenders. Americans are unlike the Japanese, who will save even at no interest. Snubbed by low rates, Americans prefer to spend rather than save. And the most of what little they save, they don’t bank but invest in corporate stocks, seeking risky but high returns. A major part of their indirect savings through pension and other funds is also invested in stocks.
The state-administered social security provided by the US government also unburdens the households from their traditional need to save for a rainy day and helps them take risks with their savings. So, thanks to the low Fed rate regime, what households would otherwise save and bank finds its way, through the retail malls, into the reserves of corporates as their income or into their capital or as market capitalisation through Wall Street. How does the money thus removed from the pockets of households multiply through the corporates, and for whose benefit?
Investment in stocks
Assume that $200 billions, that is 50 per cent of the $400-billion savings mentioned earlier, is diverted into stocks by savers directly or through pension or other funds and the balance 50 per cent is converted into consumption spend. The $200 billion fresh investment in stock market will push the stock prices and the market index or fill the coffers of the corporates to the extent it is subscription to new stocks. This will create extra demand for stocks in the market and will push stock prices and index.
Thus the fresh investment in stocks multiplies into notional wealth in the form of higher, but unrealised, stock prices. Next, the extra consumption expenditure of $200 billion too multiplies several-fold, thanks to the high velocity of circulation of the dollar. Given the current velocity of circulation of the dollar of 10 or more — namely the number of times the dollar changes hands in a year — the $200 billion consumption spend turns into a revenue aggregate of $2,000 billion ($200 b x10) for the corporates.
Assuming a profit rate of 10 per cent on sales, the pre-tax corporate profit on the revenue aggregate of $2,000 billion will be $200 billion. As a third of it goes for tax, the post-tax profit will be $133 billion. On the basis of the arithmetic average price-earnings ratio of 16 in the US stock market, this will lead to appreciation in stock values by $2.133 trillion.
So, the $400 billion inducted as capital into the stock market and as income to corporates has a multiplier effect that produces notional wealth several times the actual. But the climax of the game is yet to come. And here it is. The actual money that multiplies several-fold into notional money is turned into actual money again, as if by a magic wand.
This happens by asset value-based lending, where the notional values act as collateral to borrow and fund more consumption or further investment in stocks by borrowers.
This leads to yet another round of multiplication of the borrowed actual money into notional money. In this multiplication game, the distinction between notional and actual values disappears. The result is a sub-prime crisis and the like. More.
Corporate control
In whose hands does the actual money multiply? Not with the households that stake their money. Nor for their benefit. The Fed game ensures that it is the US corporates that will own and control the wealth. The numbers speak. From 1960 to 1980, US households had a share of 70 per cent of the national savings, and corporate savings formed the remaining 30 per cent.
In the early 1980s, families’ share rose to 80 per cent plus and the corporate share was down to 20 per cent. This was when the US Fed interest rates were at their peak — mostly above 10 per cent, encouraging families to save.
Despite an inflation rate of 1 per cent the Fed had increased its rates from 6-7 per cent in 1987 to 9 per cent and above in 1989. In 1990, the Fed rate was 7-8 per cent, the share of family savings was over 71 per cent; and the corporate share 29 per cent.
This is where the new game begins. The Fed cuts the rate gradually and brings it to just 1 per cent in 2002. The high family savings dwarfed from 71 per cent to a negative, yes negative, figure of 22 per cent in the year 2006, indicating that US families spent 22 per cent more than they earned, that is they were living on borrowing.
During the same period, the share of the corporates in total savings rose from 30 per cent in 1990 to 122 per cent of the national savings in 2006. The extra 22 per cent corporate surplus is directly sourced in the debt incurred by families to spend on corporate goods and services.
In actual terms, US family savings, which were $299 billion in 1990, fell to nil and then turned into a negative figure of $112 billion in 2006. Against this, corporate savings, which was $123 billion in 1990, sky-rocketed to a huge figure of $512 billion in 2006.
During this period, the debt owed by US households on credit cards rose from $686 billion in 1987 to $2,339 billion by September 2006. Result? Between 1990 and 2006, family savings fell by 138 per cent and their debts rose by 341 per cent, but the corporate savings rose by 416 per cent.
No expert is needed to interpret these figures. What it means to the US and to the world is yet another topic by itself. QED: The US Fed has bankrupted US households to enrich the US corporates. It is gambling not just with family money but with the idea of family itself.
(The author is a corporate adviser. His e-mail is guru@gurumurthy. net)
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