Wednesday, August 16, 2017

Why We're Doomed: Our Economy's Toxic Inequality

Anyone who thinks our toxic financial system is stable is delusional.
Why are we doomed? Those consuming over-amped "news" feeds may be tempted to answer the culture wars, nuclear war with North Korea or the Trump Presidency.
The one guaranteed source of doom is our broken financial system, which is visible in this chart of income inequality from the New York TimesOur Broken Economy, in One Simple Chart.
While the essay's title is our broken economy, the source of this toxic concentration of income, wealth and power in the top 1/10th of 1% is more specifically our broken financial system.
What few observers understand is rapidly accelerating inequality is the only possible output of a fully financialized economy. Various do-gooders on the left and right propose schemes to cap this extraordinary rise in the concentration of income, wealth and power, for example, increasing taxes on the super-rich and lowering taxes on the working poor and middle class, but these are band-aids applied to a metastasizing tumor: financialization, which commoditizes labor, goods, services and financial instruments and funnels the income and wealth to the very apex of the wealth-power pyramid.
Take a moment to ponder what this chart is telling us about our financial system and economy. 35+ years ago, lower income households enjoyed the highest rates of income growth; the higher the income, the lower the rate of income growth.
This trend hasn't just reversed; virtually all the income gains are now concentrated in the top 1/100th of 1%, which has pulled away from the top 1%, the top 5% and the top 10%, as well as from the bottom 90%.
The fundamental driver of this profoundly destabilizing dynamic is the disconnect of finance from the real-world economy.
The roots of this disconnect are debt: when we borrow from future earnings and energy production to fund consumption today, we are using finance to ramp up our consumption of real-world goods and services.
In small doses, this use of finance to increase consumption of real-world goods and services is beneficial: economies with access to credit can rapidly boost expansion in ways that economies with little credit cannot.
But the process of financialization is not benign. Financialization turns evertything into a commodity that can be traded and leveraged as a financial entity that is no longer firmly connected to the real world.
The process of financialization requires expertise in the financial game, and it places a premium on immense flows of capital and opaque processes: for example, the bundling of debt such as mortgages or student loans into instruments that can be sold and traded.
These instruments can then become the foundation of an entirely new layer of instruments that can be sold and traded. This pyramiding of debt-based "assets" spreads risk throughout the economy while aggregating the gains into the hands of the very few with access to the capital and expertise needed to pass the risk and assets off onto others while keeping the gains.
Profit flows to what's scarce, and in a financialized economy, goods and services have become commodities, i.e. they are rarely scarce, because somewhere in the global economy new supplies can be brought online.
What's scarce in a financialized economy is specialized knowledge of financial games such as tax avoidance, arbitrage, packaging collateralized debt obligations and so on.
Though the billionaires who have actually launched real-world businesses get the media attention--Bill Gates, Jeff Bezos, Steve Jobs, et al.--relatively few of the top 1/10th of 1% actually created a real-world business; most are owners of capital with annual incomes of $10 million to $100 million that are finance-generated.
This is only possible in a financialized economy in which finance has become increasingly detached from the real-world economy.
Those with the capital and skills to reap billions in profits from servicing and packaging student loan debt have no interest in whether the education being purchased with the loans has any utility to the indebted students, as their profits flow not from the real world but from the debt itself.
This is how we've ended up with an economy characterized by profound dysfunction in the real world of higher education, healthcare, etc., and immense fortunes being earned by a few at the top of the pyramid from the financialized games that have little to no connection to the real-world economy.
Anyone who thinks our toxic financial system is stable is delusional. If history is any guide (and recall that Human Nature hasn't changed in the 5,000 uears of recorded history), this sort of accelerating income/wealth/ power inequality is profoundly destabilizing--economically, politically and socially.
All the domestic headline crises--culture wars, opioid epidemic, etc.--are not causes of discord: they are symptoms of the inevitable consequences of a toxic financial system that has broken our economy, our system of governance and our society.


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Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Sunday, August 13, 2017

Are We Already in Recession?

If we stop counting zombies, we're already in recession.
How shocked would you be if it was announced that the U.S. had just entered a recession, that is, a period in which gross domestic product (GDP) declines (when adjusted for inflation) for two or more quarters?
Would you really be surprised to discover that the eight-year long "recovery," the weakest on record, had finally rolled over into recession?
Anyone with even a passing acquaintance with the statistical pulse of the real-world economy knows the numbers are softening.
-- Auto/light truck sales: either down or off a cliff, depending on how much lipstick has been applied to the pig.
-- Restaurant/dining sales: down.
-- Tax receipts: down.
-- Retail sales: flat, stagnant or down, depending on the sector and if the numbers have been adjusted for inflation/loss of purchasing power.
-- Rents in high-rent regions: finally softening after years of relentless increases.
-- Consumer debt: hitting new highs.
-- Corporate profits: stripped of gimmickry, stagnant or down.
Those who study recessions know that employment often tops out just before the economy rolls over into recession. Strong employment is the last gasp of an expansionary phase.
There are several fundamental reasons why we might be in a recession that manages to avoid the official definition. The starting place is the artificial nature of the eight-year long "recovery" since 2009; in the view of many observers, the economy never really exited the 2008-09 recession.
Those in this camp look at fundamentals, not the stock market, which has been held up as a proxy for the real economy, when in fact it is only a proxy for financialization and official selection of the market as the (easily manipulated) signifier of economic vitality and prosperity.
Recessions are supposed to clear the financial deadwood--failed enterprises are liquidated, borrowers who are in default are bankrupted, and bad debt is wiped off the books via the acceptance of losses.
The story of the "recovery" 2009-2017 is that these clear-the-deadwood dynamics were suppressed. Rather than accept painful losses, the authorities saved bankrupt banks and encouraged a Zombie Economy in which zombie borrowers and enterprises are kept alive via low-cost loans and the masking of default via financial trickery: student loans that are non-performing, for example, aren't labeled "in default;" they're placed in a zombie category of forgiveness without actual writedowns of the debt.
If households can no longer afford to pay interest on new debt, the "solution" in a Zombie Economy is to offer them 0% loans. If corporations need to roll over debt, the Zombie Economy "solution" is the companies sell near-zero yield bonds to credulous investors.
If households can no longer afford to buy homes, the Zombie Economy "solution" is for federal agencies such as FHA to offer near-zero down payment mortgages and guarantee private lenders against any loss.
When these agencies get into trouble due to the horrendous costs of encouraging uncreditworthy borrowers to take on debt they can't afford, the "solution" is for the taxpayers to fund yet another $100 billion bail-out.
The stark reality is fulltime jobs, productivity and profits are all subpar. As I have noted many times, wages for the bottom 95% have gone nowhere since 2000 when adjusted for inflation. Households can no longer afford more debt unless it's at near-zero rates of interest.
Fulltime employment--the bedrock of consumer spending and borrowing--has barely moved in eight years. Part-time waiters can't afford to buy homes or new vehicles.
Wealth and income can only be generated in the real world by increases in productivity. Unfortunately for the "recovery" narrative, productivity is tanking.
Corporate profits are also going nowhere.
In essence, the "recovery" economy is a zombie economy living on great gulps of new debt that it can't service. As sales, profits and tax receipts weaken, eventually employment weakens, too, as employers trim costs by cutting positions, hours worked, etc.
Eventually, zombie borrowers give up trying to service unpayable debts, zombie companies close their doors, and the illusion of "growth" collapses in a heap of corrupted numbers and false signifiers.
The "recovery" game will shift to massaging GDP so it ekes out .1% "growth" every quarter until Doomsday. The Zombie Economy can be kept alive indefinitely--look at Japan--but it not a healthy or vibrant or equality-opportunity economy; it is a sick-unto-death economy of fake narratives (growth is permanent) and fake statistics (we've revised previous numbers so that, surprise, GDP is still positive.)
If we stop counting zombies, we're already in recession.


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Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Thursday, August 10, 2017

What the Mainstream Doesn't Get about Bitcoin

The real demand for bitcoin will not be known until a global financial crisis guts confidence in central banks and politicized capital controls.
I've been writing about cryptocurrencies and bitcoin for many years. For example: Could Bitcoin Become a Global Reserve Currency? (November 7, 2013)
I am an interested observer, not an expert. As an observer, it seems to me that the mainstream--media, financial punditry, etc.--as a generality don't really grasp the dynamics driving bitcoin and the other cryptocurrencies.
What the mainstream does get is speculative frenzy. New technologies tend to spark speculative manias once the adoption rate exceeds the Pareto Distribution's critical threshold of 4%, and opportunities to buy into the new technology become available to the general public.
Just as radio and the Internet sparked speculative manias in their boost phase, cryptocurrencies have sparked their own speculative frenzy.
Where the mainstream goes wrong is assuming that's all there is to bitcoin: a speculative mania. The Establishment often dismisses transformative technologies as fads or gimmicks; thus the infamous rejection of photocopy technology as only of interest to a dozen large corporations, personal computers belittled as being of limited utility (storing kitchen recipes), and so on.
New transformative technologies develop in an unpredictable fashion, and early-phase critics and prognosticators often end up looking foolish on both ends of the spectrum: by dismissing the transformative potential of the new technology (Paul Krugman's famous obituary for the Internet in the late 1990s) or by making fantastic claims that exceed the reach of the current technology.
The mainstream also misses the core driver of bitcoin and cryptocurrencies: the current financial system is doomed, and some other arrangements will emerge. Those who get on board alternative arrangements early will likely preserve more of their wealth than those who believe the current system is permanent, and some may earn great wealth as capital flees the sinking ship of central banking/credit for more secure climes.
The inevitable collapse of the fully financialized exploitive Empire of Debt is verboten in the mainstream, for obvious reasons. The herd is already restless, as it intuits the present faux "prosperity" is fragile, and so the mainstream's job, as it were, is to maintain the delusion that the exploitive Empire of Debt is permanent and the only possible financial system.
The herd also intuits that an Elite that lies when it gets serious cannot be trusted. As all the internal contradictions and excesses of the present financial system weaken its foundations, financial and political Elites must obfuscate, lie and manipulate via gamed statistics, false narratives and media spin lest the increasing instability panic the unsettled herd.
The third dynamic the mainstream misses is the potential role of bitcoin in preserving the wealth of the very Elites who best understand the weaknesses of the present financial system. A number of very smart people assure me the U.S. government can (and will) shut down bitcoin overnight by restricting or outlawing exchanges' access to the banking systems' payment platforms that enable people to exchange bitcoin/ fiat currencies.
My response is this question: what will best serve the interests of the wealthy and super-wealthy? If this sucker's going down, to quote former President G.W. Bush, those with wealth and political power are not going to allow regulators to seal an escape hatch that might serve their goal of wealth preservation.
The current interest of hedge funds and other managers of wealth in bitcoin suggests this is precisely how bitcoin is being perceived. This interest will only increase as the seams of the current financial system start unraveling.
If bitcoin is perceived as a threat to Elite wealth preservation, the Elites will deploy their political power to suppress bitcoin. But I consider this unlikely, for a reason rich in irony: bitcoin's independence from the fiat/central bank credit system that has enriched the few at the top of the pyramid at the expense of everyone else is the very reason it offers more stability than the doomed-to-devaluation credit-bubble currencies.
Given bitcoin's tiny share of global wealth, how much of a threat can it pose to the super-wealthy elites?
I suspect the big wealth managers are only beginning to get interested in bitcoin; the Early Adopters tend to be small players with larger appetites for risk than the institutional players.
I've marked up a chart of bitcoin to suggest there may be a fractal pattern in play: notice the previous two periods of volatile upswings and downdrafts. The 30+% swings appeared monstrous at the time, but looking back, they look more like blips.
What will the current dramatic run-up, sharp decline and new high above $3,400 look like from the heights of $10,000?
As I have said before, the real demand for bitcoin will not be known until a global financial crisis guts confidence in central banks and politicized capital controls. Only then will we know for sure how the financial and political Elites will view bitcoin: as a threat to their wealth or as a lifeboat with precious few seats.
Of interest:
The Path to $10,000 Bitcoin January 11, 2017
Note to readers: Life has put on a full-court press, and the pressure will remain intense for the rest of August. I am unable to respond to any email or messages, and the blog will be put in maintenance mode. Thank you for your understanding.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Tuesday, August 08, 2017

Powerlessness and Consumerism

Consumerism is a simulacrum of real economic agency.
There is perhaps no better metric of class in America than personal power--what is known as agency: the power to influence or transform one's circumstances in a a self-directed manner. Those with agency have power, those without agency (or very limited agency) are essentially powerless.
The more capital you have, the greater your power to influence or change your circumstances. The less capital one has, the less power one has to influence the world around us. This is why money equals power: cash enables the purchase of all sorts of extensions of agency: transport, education, assistance, expertise and so on.
But cash isn't the only form of capital that can be drawn upon to generate agency: credit is almost as good as cash, if one can borrow the money at near-zero rates of interest. The intellectual/social capital implicit in entrepreneurial agency is not financial, but it empowers those who possess it in ways that cash or credit alone cannot.
If we add these tangible and intangible forms of capital up, we get a taxonomy of agency/power: those with little capital or credit, and little intellectual/social capital to draw upon for agency are powerless in an economy and society where everything has a price and everything is for sale to the highest bidder.
Those with financial capital, access to low-cost credit and reserves of intellectual/social capital that can be transformed into entrepreneurial agency have economic agency.
This taxonomy explains why those who are financially impoverished but rich in entrepreneurial values, skills and social connections are not powerless, despite being poor. For those with economic agency, opportunities abound--especially in new fields that have not yet been locked down by monopolies, such as blockchain technologies.
This taxonomy helps explain why so much of the middle class is a few paychecks away from dropping out of the middle class: those with access to credit enabled by paid work, but little reserves of the sort of intellectual/social capital required to tap the opportunities in the emerging economy, find their agency vanishes once they lose their job and the access to credit it enabled.
The difficulty many now face is the skills that were once a form of valuable intellectual capital have been depreciated by software/AI, automation and globalization's vast labor pool. The market value of any one particular skill is contingent and thus vulnerable to technological advances or changes in the supply and demand of that skill.
The entrepreneurial/social forms of capital that I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy are broader and more flexible; these are the higher-level forms of capital that enable an individual to learn a new skill and develop a new set of connections (social capital) as circumstances change.
Individuals with little economic or political agency are offered one default form of agency: consumerism. If one has enough cash or credit to become a customer, this agency of consumption is experienced as a form of power, even if the sum available to spend is small.
This is one of the attractions of dollar stores; the low prices enable those with little money to experience the agency of consumption: $5 enables the consumer to select five items to buy, and this power to choose is like an oasis of agency in a desert of economic and political powerlessness.
Even $1 is enough to become a customer, which in a consumer-based economy manifests a specific commercial-transaction type of power: the clerk must endeavor to meet the customer's requests and treat every customer with a respect they might not receive outside a consumer-customer setting.
No wonder consuming/buying is so intoxicating/addictive: it is a readily accessible manifestation of agency in an economy in which true economic agency is scarce. Experiencing one's relative powerlessness is intrinsically debilitating, and so we naturally seek some experience of agency, however modest and fleeting.
The downside of consumerism is two-fold: consuming as a manifestation of agency is inherently superficial; the "high" of selecting and buying stuff is fleeting, and the churn of consumption--one must constantly be shopping and buying to maintain the sense of agency--reduces the capital available to pursue true economic agency.
The other downside is this superficial and fleeting consumerist agency fuels a landfill economy in which low-quality goods are purchased on credit for the brief "high" and then discarded in the landfill shortly thereafter, freeing up space for the purchase of more stuff: Our Landfill Economy.
Eventually, individuals with little real economic agency run out of credit, and their ability to consume more collapses. The "solution" to this inevitable decline in creditworthiness is 0% financing and similar financial gimmickry that extends and pretends the illusion of endless credit-based consumption.
Meanwhile, the planet is being stripmined to fabricate and transport all the stuff that's purchased and dumped in the Landfill Economy.
Consumerism is a simulacrum of real economic agency. It's a psychological balm for political and economic powerlessness, but it is no substitute for the ownership of capital that enables true economic agency.
Note to readers: Life has put on a full-court press, and the pressure will remain intense for the rest of August. I am unable to respond to any email or messages, and the blog will be put in maintenance mode. Thank you for your understanding.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Eric C. ($50), for your outstandingly generous contribution to this site -- I am greatly honored by your support and readership.
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