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SYSTEMIC FRAGILITY
in the
GLOBAL ECONOMY

Jack Rasmus

ISBN 978-0-9860769-4-7
490 pp. $29.95  2015












EBOOK:
ISBN 978-0-9860769-3-0
$19.00
SYNOPSIS

Just as contemporary economics failed to predict the 2008-09 crash, and
over-estimated the subsequent brief recovery that followed, economists
today are again failing to accurately forecast the slowing global economic
growth, the growing fragility, and therefore rising instability in the global
economy.  

This book offers a new approach to explaining why mainstream economic
analyses have repeatedly failed and why fiscal and monetary policies have
been incapable of producing a sustained recovery.

Expanding upon the early contributions of Keynes, Minsky and others, it
offers an alternative explanation why the global economy is slowing long
term and becoming more unstable, why policies to date have largely failed,
and why the next crisis may therefore prove even worse than that of 2008-
09.

Systemic fragility is rooted in 9 key empirical trends:  slowing real
investment; a drift toward deflation; money, credit and liquidity explosion;
rising levels of global debt; a shift to speculative financial investing; the
restructuring of financial markets to reward capital incomes; the restricting
of labor markets to lower wage incomes; the failure of Central Bank
monetary policies; and the ineffectiveness of fiscal policies.

It results from financial, consumer, and government balance sheet
fragilities exacerbating each other -- creating a massive centripetal force
disaggregating and tearing apart the whole, untameable by either fiscal or
monetary means.

This book clarifies how the price system in general, and financial asset
prices in particular, transform into fundamentally destabilizing forces under
conditions of systemic fragility.  It explains why the global system has in
recent decades become dependent upon, and even addicted to, massive
liquidity injections, and how fiscal policies have been counterproductive,
exacerbating fragility and instability.

Policymakers’ failure to come to grips with how fundamental changes in the
structure of the 21st century global capitalist economy—in particular in
financial and labor market structures—make the global economy more
systemically fragile can only propel it toward deeper instability and crises.

An appendix describes three simultaneous equations that express in
notational form the variables associated with the Theory of Systemic
Fragility.
TABLE OF CONTENTS

INTRODUCTION
Fundamental Trends & Determinants
Key Variables and Forms of Fragility
Instability in the Real Economy
Financial Instability in the Global Economy
Outline of the Book

PART I: STAGNATION AND INSTABILITY IN THE GLOBAL ECONOMY

1. FORECASTING REAL & FINANCIAL INSTABILITY
The Chronic Problem of Over-Optimistic Official Forecasts
2014:  Transition Year for the Global Economy
    Europe
    Japan
    China
    Global Oil Deflation
    EMEs
    USA
The Prediction Dilemma Posed by SWANS—Gray and Black
IMF’s Global Economic Forecasts
World Bank Forecasts
OECD Forecasts
Global Central Bank Forecasts
The Inability to Forecast Financial Instability

2. THE ‘DEAD-CAT BOUNCE’ RECOVERY
Dead Cats and Epic Recessions
Five Realities of the Post-Crash ‘Bounce’
Secular Stagnation—A New Normal?
Industrial Production and Trade Recessions Are Already Here
Redefining GDP to Overestimate Global Growth
One More Bounce?

3. THE EMERGING MARKETS’ PERFECT STORM
What’s an EME?
External Forces Destabilizing EMEs
The China Factor
The AE Interest Rate Factor
Global Currency Wars
Global Oil Deflation
Who ‘Broke’ the EME Growth Model?
Internal Forces Causing EME Instability
EME Capital Flight
EME Currency Collapse
Domestic Inflation
Brazil:  Canary in the EME Coalmine?
EME Financial Fragility & Instability

4. JAPAN’S PERPETUAL RECESSION
Japan’s ‘Made in the USA’ Bubble and Crash
Japan’s Rolling Banking Crisis
Lessons of 1990-2005 Ignored
Japan’s Five Recessions
Japan’s Response to Recession, 2008-2012
Shirakawa’s Warning
‘Abenomics’ 1.0: Back to the Future
Abenomics 2.0: Doubling Down on Policy That Doesn’t Work
Growing Fragility in the Japanese Economy

5. EUROPE’S CHRONIC STAGNATION
The Limits of Exports-Driven Recovery
German Origins of Eurozone Instability
Eurozone’s Double Dip Recession:  2011-2013
ECB Opens the Money Spigot … Just a Little
Germany’s Export Pivot to Asia
Eurozone’s 2nd Short, Shallow Recovery:  2013-2014
Eurozone’s QE Money Firehose: 2015
‘Triple Dip’ Recession on the Horizon?
Lessons the Eurozone Has Yet to Learn

6. CHINA:  BUBBLES, BUBBLES, DEBT AND TROUBLES
China’s Successful Fiscal Recovery Strategy: 2009-2012
AE’s Failed Monetary Recovery Strategy:  2009-2015
China’s Liquidity Explosion
The Inevitable Debt Crisis
China’s Shadow Banks
China’s Triple Bubble Machine
China’s Real Economic Slowdown: 2013-2015
China Global Contagion Effects
China & Global Systemic Fragility

PART II: THE DEAD CAT’S 9 LIVES:  
KEY TRENDS OF SYSTEMIC FRAGILITY

7. SLOWING REAL INVESTMENT
Real Investment vs. Financial Investment
Slowing Real Asset Investment
Causes of Slowing Real Investment

8. DRIFT TOWARD DEFLATION
Deflation Effects on Investment, Consumption and
Financial Assets
From Global Disinflation to Deflation
    Europe
    Japan
    China
    Emerging Markets
    USA
       Good vs. Bad Deflation Debate
    Oil, Commodities, and Financial Asset Deflation
    QE and Deflation
    Austerity and Goods Deflation
       Deflation and Systemic Fragility

9. MONEY, CREDIT & EXPLODING LIQUIDITY    
Liquidity as Central Bank Money
Liquidity as Inside Credit
The Myth of US Debt Deleveraging

10. RISING LEVELS OF GLOBAL DEBT
The Continuing Rise in Global Debt
Debt and Fragility

11. THE SHIFT TO FINANCIAL ASSET INVESTMENT
Origins of the Financial Asset Investment Shift
Enabling Causes of the Shift
Expnding Price-Profit Gaps
How Big Is the Shift?
The Unstable Financial Asset Markets
Where Is the Next Financial Fault Line?
    Global Equity Markets
    Global Bond Markets
    Emerging Markets’ Corporate Debt
    Chinese Financial Markets
    US Financial Markets
    European Financial Markets
    Other Global Financial Markets
    Securitized Financial Asset Markets
       The Shift, Financial Fragility, and Instability

12. STRUCTURAL CHANGE IN FINANCIAL MARKETS   
From Liquidity & Debt to a New Financial Structure
What Is a Shadow Bank?
How Big Is Global Shadow Banking?
    US Shadow Banking
    Chinese Shadow Banking
    Europe’s Lagging Shadow Bank Sector
    A Short List of Major Shadow Banking Categories
       The New Finance Capital Elite
The Futility of Shadow Bank Regulation
Why Shadow Banking Is Fundamentally Unstable
Changing Financial Structure as Source of Financial Instability

13. STRUCTURAL CHANGE IN LABOR MARKETS
Financial and Consumption Fragility Compared
Forms of Labor Market Structural Change
Changes in Job Structure
    Growth of Contingent Employment
    Decline of Manufacturing-Construction Employment
    Changing Structure of Unemployment
    De-Unionization and Decline of Collective Bargaining
       Changes in the Wage Structur
    Hollowing Out the Middle Tier
    Shrinking the Minimum Wage        
    Overtime Pay Exemptions
    General Wage Theft
    Cost Shifting Health Care
       Reductions in ‘Deferred’ and ‘Social’ Wages
    Decline of Deferred Wage Income
    The Decline in Social Wage Income
       Changes in Hours of Work Arrangements
    Tech Time
    Home Time
    Travel Time
    Double Time
    Unpaid Internships
       The Emerging ‘Sharing’ Economy
Debt as a Reduction of Future Wage Income
Wage Income, Debt, and Consumption Fragility

14. CENTRAL BANKS & STRUCTURAL FRAGILITY
Monetary Policy Tools—Old & New
The $25 Trillion Global Bank Bailout
Why Free Money Continued After the Bailouts
Central Bank Liquidity Feeds Financial Asset Inflation
The Contradictions of Central Banking
Why Central Banks Don’t Stop Financial Bubbles
Central Banking and Systemic Fragility        

15. FISCAL POLICY & GOVERNMENT FRAGILITY
Defining Government Debt and Income
Estimating Government Debt
Key Trends:  Government Debt, Income & Fragility
    Trend #1: Secular Trends and the Rise in Government         
                  Debt
    Subcontracting Government Services
    Privatizing Government Production Assets and Services
    Shifting Debt:  From Corporations to Government to Households
    Trend #2: Business Cycles and Short Term Government
                  Debt
    Government Debt from Central Bank Bailouts
    Government Debt from Government Bank Bailouts
    Government Debt from Special Agency Bailouts
    Government Debt from Non-Financial Corporate Bailouts
    Government Debt from Transfers and Subsidies to Households
    Trend #3: Government Income & Government Debt
    Secular Corporate Tax Reduction
    Cyclical Corporate Tax Reduction
    Investor Incomes Tax Reduction
    Addendum:  Corporate Cash Piles and Distributions
                  Government Income and Failing Economic Recovery
    Trend #4: Neoliberalism Solutions to Government Debt:  the ‘Twin Deficits’        
    US Twin Deficits
    The Eurozone’s Failed ‘Twin Deficits’ Strategy
      Debt, Income and Government Fragility

PART III: THE FAILED CONCEPTUAL FRAMEWORK OF
CONTEMPORARY ECONOMIC ANALYSIS

16.   HYBRID KEYNESIANS & RETRO-CLASSICALISTS
Conceptual Limits of Classical Economics
Postscript on Marx’s Economics
The Neoclassical Detour: 1870s to 1920s
Keynes’ Original Contributions
The Limitations of Keynes
Austrian Credit Cycles
The Hybrid-Keynesians
The Retro-Classicalists

17. MECHANICAL MARXISM
Critiquing the Propositions of Mechanical Marxist and
Falling Rate of Profit (FROP)                
FROP Explains Short Run Business Cycles
Negative Productivity, Supply Side, and Collapsing
   Long Run into Short Run
Only Productive Labor in Goods Production Creates
    Surplus and Profits
Only Primary Exploitation of Productive Labor
    Determines Changes in Profits
Redefining Profits to Fit the Theory
Profits Determine Real Asset Investment
Real Investment Drives Financial Investment
Financial Assets are ‘Fictitious’ Capital & Independent
    of Real Investment & Cycles
Financial Asset Prices Are Not Responsible for
    Economic Instability
Banks Are Intermediaries Redistributing Profits as Credit
Money, Credit and Debt
Summary
A Note on Marx on Finance in Vol. 3 of Capital

18. THE CONTRIBUTIONS & LIMITS OF MINSKY’S ‘FINANCIAL INSTABILITY
HYPOTHESIS’
Marx and Keynes Were Before Their Time
Minsky on Financial Instability
Minsky’s Contributions
The Limits of Minskyan Analysis
The Missing Dichotomy of Investment
The Burden of Kalecki’s Theory of Profits
Two- vs. Three-Price Theory
Flow vs. Income Analysis
Fragility’s Undeveloped 3rd Key Variable
Government as Solution vs. Source of Fragility
Dynamic & Systemic v. Financial Fragility
Transmission Mechanisms
Institutional Framework
Origins of Debt
Money v. Inside Credit
Business Cycles & Phases of Profits-Debt

PART IV: A THEORY OF SYSTEMIC FRAGILITY

19. A THEORY OF SYSTEMIC FRAGILITY
The Historical Context
Some Queries from History
Excess Liquidity at the Root of Debt Accumulation
Money Liquidity
Inside Credit Liquidity
From Excess Liquidity to Excess Debt
Debt and the Shift to Financial Asset Investing
Financial Asset v. Real Asset
Financial Asset Investing Shift
The New ‘Spread’: Financial v. Real Investment
From Stagflation to ‘Definflation’
The Irrelevant ‘Money Causes Inflation’ Debate
Liquidity As Brake on Real Growth
Restructuring Financial and Labor Markets
Financial Market Structural Change
Labor Market Structural Change
Structural Change and Fragility
Fiscal-Monetary Policy:  From Stabilizing to Destabilizing
What Can Be Done
A Brief Recapitulation of Key Trends & Systemic Fragility
Measuring the Three Forms of Systemic Fragility
Fragility Feedback Effects
Transmission Mechanisms of Systemic Fragility
Price Systems as TXM
Government Policy as TXM

APPENDIX
Preliminary Equations for a Theory of Systemic Fragility
Dr. Jack Rasmus is the author of several books on the USA and global
economy, including
Epic Recession: Prelude to Global Depression, 2010,
Obama’s Economy, 2012, and An Alternative Program for Economic Recovery,
2012. He hosts the weekly New York radio show, Alternative Visions, on the
Progressive Radio network; is shadow Federal Reserve Bank chair of the
‘Green Shadow Cabinet’ and economic advisor to the USA Green Party’s
presidential candidate, Jill Stein. He writes bi-weekly for Latin America’s
teleSUR TV, for Z magazine, Znet, and other print & electronic publications.  
Dr. Rasmus studied  economics  at  Berkeley,  took  his  doctorate  in  the  
University  of  Toronto (1977), and worked for many years as a union organizer
and labour contract negotiator.  He currently teaches economics and politics at
St. Marys College in California.
Fake recovery, failing fix-its:  going nowhere faster
View index
REVIEWS

"Systemic Fragility in the Global Economy offers a penetrating analysis of economic stagnation in
advanced economies by providing a sustained and systemic focus on the role of finance, an analysis that
probes further than mainstream economic analysis. Rasmus has made a signal contribution to
contemporary economics and provided a vitally important X-ray of the political economy of stagnation.."
Jan Nederveen Pieterse, University of California Santa Barbara, in Journal of Post Keynesian
Economics, 2017   

"Systemic Fragility in the Global Economy (2015) is the fourth in a series that Rasmus has produced
within this broad intellectual and activist project. Each work not only provides  a  theoretically-informed,  
empirically-grounded  diagnosis  but  also  offers  a  wide-ranging  set  of  policy  recommendations  
aimed  at  progressive  movements... The case studies of the USA, Europe, Japan and China are
excellent, typically contrarian, and  highly  teachable.  Many  important  and  provocative  arguments  and  
points  are  made in passing in these studies and they are strengthened by the more sustained
theoretical  analyses  that  follow.  A  major  contribution  is  the  analysis  of  the  complexity  of  shadow  
banking,  an  ill-defined  term  of  art  in  most  of  the  literature."
Prof. Bob Jessop, Lancaster University, UK, Capital & Class, Vol. 40, No. 2, June 2016

"[T]here are many strengths in Rasmus’s synthesis. These include his suggestion that more relevant
comparisons might be made between 1907-09 and 2010-2016 than with the years of the Great
Depression, a point that has also been made by Barry Eichengreen. Rasmus does a good job in arguing
that economic forecasts tend systematically to err on the optimistic side, for some of the same reasons
that stock analysts are on average excessively optimistic about the prospects for individual stocks (pp. 35-
36). He points out that households have not affirmatively deleveraged – the modest drop in their debt
ratios is mostly due to banks writing off bad credit card or mortgage debt (p. 198). He includes a
thoughtful discussion of what institutions should be considered part of the shadow banking sector (pp.
225-33). And he is correct to argue that in terms of output loss we should focus on more than just the
years of recession – he counts recovery as dating from when we return to the pre-crash level of output
(pp. 5-51). I would be even more radical and consider the economy not fully recovered until it returns to
the pre-crash trajectory of potential for the US – that estimated in the January 2008 CBO Budget and
Economic Outlook.  Overall, Rasmus has supplied a great deal of food for thought in exploring issues
central to the world economy. In stimulating readers to think about them – even to the point of
disagreement – he has provided a very real service."
Alex Field, The European Financial Review, April, 2016

"This is a great book and the substantial effort it takes to read it is well worth it. It is both a compelling
economic history and a call for change...Rasmus does describe the necessary tools to bring back a real
economy of real jobs and real income growth for all but the lower 90% are so beaten, atomized, and
misled that a global explosion on the level of the 1930's Great Depression is almost inevitable."

David R. Baker, Business Reporter, San Francisco Chronicle, reviewed on amazon.com

"a thought-provoking contribution to an understanding of the fragility of modern capitalism.  It’s a ‘must
read’ in a year that is generating a whole new range of radical and Marxist books on capitalism and its
laws of motion..."
Michael Roberts blog
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Outline of the Book

Following a brief overview addressing the consistently over-optimistic forecasts of global growth by business
and international economic bodies in chapters 1-2, recent key global developments are highlighted in chapters
3-6 that reveal the global economy in 2015 is experiencing greater potential for financial instability than ever
since 2007-08.

Chapters 3-6 provide selected cases reflecting today’s growing instability in global oil and commodity markets;
the steadily intensifying commodity price deflation; Emerging Market Economies’ collapsing currencies, capital
flight, growing local financial market instability, rising import inflation, and declining export income necessary to
finance dangerously accelerating external debt; the growing desperation of policy makers and central bankers
in Europe and Japan to jump start their economies, as they introduce ‘dueling QEs’ and ‘internal devaluations’
designed to reduce labor costs in an effort to drive down their currencies in order to capture a larger share of
exports amidst a slowing of total world trade; and the growing financial asset bubbles in China which policy
makers there have been unable to contain or reduce. Whether China, Europe-Japan, Emerging Markets, or
Global Oil-Commodities—all reflect financial instabilities in the global economy at a time when a growing
number of real economies continue to weaken as well. These developments and events serve, one might
argue, as the ‘canaries in the global financial coal mine’.

In Part Two of the book, chapters 7 through 15, the discussion moves from selected case narratives
highlighting the most obvious contemporary evidence of global instability—in emerging markets, Europe and
Japan, and China—to a deeper level discussion focusing on 9 key variables behind the next financial crisis
now developing endogenously within the global financial system today. Here discussion focuses on the real,
material conditions and forces that underlie the appearances of the crisis.

Part Two provides a transition to the all important need for theory to understand where the global economic
has been, is now, and, most important, where it may be going in the coming years. Without the projections
enabled by theory, only empirical narratives remain. Without coming to grips with the most important
information of the past, descriptions of the present can provide no accurate forecast of the future.
Unfortunately, this is the state of much of contemporary economic analysis today.

But what are the limitations of contemporary economic analysis on the subjects of financial instability,
investment, and the relationships between financial cycles and real cycles? That is the subject of Part Three
and chapters 16-18 of this book. Chapter 16 critiques in detail the two major wings of contemporary
mainstream economic analysts—what this writer has termed ‘Hybrid Keynesians’ and ‘Retro-Classicalists’. It is
argued that neither wing sufficiently understands the relationships between financial asset investment, real
asset investment, and what this book views as the accelerating ‘speculative investment shift’ that is the
consequence of those new relationships. Nor does either sufficiently understand how debt and incomes have
grown increasingly mutually interdependent in a negative way, instead of functioning individually as positive
sources of economic growth. Both misunderstand how financial asset prices destabilize the system. And both
have an overly optimistic assessment of the role of traditional policies—the one monetary and the other fiscal.
Their largely shared conceptual apparatus thus serves as an obstacle to understanding the new
characteristics of the 21st century capitalist economy.

Chapter 17 challenges the dominant wing of Marxist economic analysis today that argues the falling rate of
profit from production of real goods (by what Marxists define as productive labor) is the key (and virtually only)
driver of the slowing of the global economy and in turn is responsible for the shift to financialization of the
economy. This book will argue that this is a kind of ‘mechanical’ application of Marxism that ignores and
misunderstands the exchange side of the circuit of capital that Marx himself never fully developed. The falling
rate of profit approach (FROP) represents a ‘glass half filled’ theory. It views all instability as determined by the
production of real goods by only productive labor—i.e. those workers who produce real goods and related
support services. Causation between the real and financial sides of the economy are viewed as a ‘one way
street’ only, from production to financial, instead of a more likely mutual interaction between the two sectors.
What the falling rate of profit theorists fundamentally fail to understand, it will be argued, is that it is investment
that drives the economy—not a particular form of financing—i.e. profits—that drive investment.

Like the two wings of mainstream economists, the FROP wing of Marxist economic analysis thus lacks an
adequate conceptual apparatus for properly understanding the relationships between financial asset and real
asset investing in the 21st century global economy. In important ways, none of the three wings accurately
reflect the richer views and ideas of those economists with whom they are associated. The ‘Hybrid’ Keynesians
distort Keynes; the ‘Retro-Classicalists’ also misrepresent Keynes and others in their effort to restore classical
economic analysis of the 18th-19th century, and the ‘Mechanical Marxists’ fail to understand Marx’s own
method and to recognize where Marx was going in his final thoughts on banking, finance, and new forms of
exploitation only beginning to emerge in late 19th century capitalism.

Chapter 18 addresses the major contributions by the economist, Hyman Minsky, whose work is most
associated with the idea of what he called financial fragility. Writing mostly in the 1980s and 1990s, Minsky
broke new ground in a number of ways on the subject of how financial cycles and real cycles mutually impact.
His key contributions are noted. However, much was left unsaid by Minsky, who did not get to see the 21st
century’s full manifestation of his initial observations. While noting his contributions, this chapter describes in
detail the limits of his theory as of the mid-1990s, suggesting where it might have had to go in order to more
fully explain how fragility in general is a major determinant of both financial and real instability of the global
economy in the 21st century.

Part Four of this book provides this writer’s own analysis and theory of where the global economic crisis has
been, and where it may be headed. That analysis is subsumed under the conceptual notion of ‘Systemic
Fragility’, that has been referenced and raised in part in the preceding chapters, and which is summarized in
more detail in this final chapter 19, ‘A Theory of Systemic Fragility’. Accompanying this summary chapter is an
addendum, consisting of equations that represent the main arguments of chapter 19.

The concluding chapter’s preliminary statement of a theory of Systemic Fragility is envisioned as an effort to
begin to develop a new conceptual framework for the analysis of financial and real cycle interactions that
represent the dominant characteristics of the capitalist global economy in the 21st century. It is viewed as
merely a first step.”
FROM REVIEWS OF EARLIER WORKS:

Obama’s Economy:  Recovery for the Few

“Rasmus, a veteran economist, offers an unremittingly bleak assessment of the Obama administration’s
failure to promote a strong and broad-based recovery from the Great Recession of 2007-09. Written in
late 2011, his gloomy predictions about the limited nature of jobs growth have been fully borne out.”
Review of Books, London School of Economics & Political Science

Epic Recession: Prelude to Global Depression

“Jack Rasmus’s book is not just another chronological account of the current economic crisis or a
simplistic denunciation of financial ‘animal spirits’. Nor does it replicate superficial discourses of business
analysts and the financial press, which put ali the blame for the crisis on abusive bank practices and the
violation of market mechanisms. Instead, in a counterpoint to neoliberal discourse and financial jargon,
Rasmus’s book offers readers an illuminating and developed theoretical framework that adds to our
understanding of specific contours of the current crisis, and its difference from earlier crisis experiences.”
Capital & Class, Vol. 36, No. 2 , June 2012