Friday, April 19, 2019

How Empires Fall: Moral Decay

There is a name for this institutionalized, commoditized fraud: moral decay.
Moral decay is an interesting phenomenon: we spot it easily in our partisan-politics opponents and BAU (business as usual) government/private-sector dealings (are those $3,000 Pentagon hammers now $5,000 each or $10,000 each? It's hard to keep current...), and we're suitably indignant when non-partisan corruption is discovered in supposed meritocracies such as the college admissions process.
But we're less adept, it seems, at discerning systemic moral decay, which infects the very foundations of the economy and society.
Consider America's favorite pastime, corrosive partisan politics. This distemper is often traced back to (surprise!) extreme partisans, but as the chart below shows, political partisanship has risen in near-perfect correlation with wealth-income inequality, which it itself the hallmark of deeply systemic corruption, as the system is rigged to benefit the few at the expense of the many. (Chart courtesy of Slope of Hope.)
There's a phrase that describes a socio-economic system becoming the means for personal aggrandizement at the expense of civil society itself: moral decay.How else can we describe a system whose inputs and processes are rigged so the output is the vast majority of all income gains flow to the top 0.1%? (See chart below.)
When a socio-economic system institutionalizes the extralegal privileges of wealth and power, that is moral decay. When government only responds in ways that first serve the interests of entrenched insiders, that is moral decay. When the financial system is rigged to sluice income and wealth to the top of the wealth-power pyramid while stripmining the productive class below via inflation and taxes, that's moral decay. (See chart below of workers' share of the national income.)
What are initial public offerings (IPOs) of unprofitable Unicorns but a form of institutionalized, commoditized fraud based on the sale of worthless securities to greater fools who are gambling that a second wave of even greater fools will pay a premium to gamble that the worthless shares can be sold to a third wave of supremely greater fools?
There is a name for this institutionalized, commoditized fraud: moral decay.
What are stock buy-backs but a form of institutionalized, commoditized fraud in which insiders borrow vast sums to reduce the number of shares outstanding to boost the per-share profits and hence the valuation of their portfolios and stock options? How does civil society benefit from this hyper-financialized concentration of wealth and thus political power?
There is a name for this institutionalized, commoditized fraud: moral decay.America is fatally riddled with institutionalized moral decay, and so are the competing powers of the EU, Japan, Russia and China.
Moral decay is the only possible output of systems that place the accumulation of personal wealth and political power above all other civic and economic values. When every system is nothing but a means to institutionalize and commodify fraud and extralegal privilege, there is no saving such a perversely asymmetric system from internal collapse.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.


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Posted by Charles Hugh Smith at 8:52 PM

Wednesday, April 17, 2019

The Next Financial Crisis Won't Be Caused by Fraud: This Time Will Be Different

Extreme levels of debt and overvaluation characterize the entire global economy, and are not limited to any one nation or sector.
Financial crises come in two flavors: fraud and credit-valuation over-reach.Fraud-based financial crises may differ in particulars, but they share many traits: perverse incentives are institutionalized; the perverse incentives reward figuring out how to evade oversight via fraud, embezzlement, masking risk, etc. which are soon commoditized; regulations are gutted by insider-funded lobbying; regulators fail to do their job in hopes of getting lucrative positions in the industry they're supposed to be regulating; reports of systemic, commoditized fraud are ignored because everyone's getting rich, and so on.
The resolution has to 1) eliminate the perverse incentives that fueled the crisis; 2) institutionalize oversight that actually functions to limit dangerous excesses and 3) all the malinvestment / bad debt must be liquidated and the losses taken / distributed.
Correspondent David E. recently sent me this insightful outline of how the Texas Savings & Loan financial crisis arose and was slowly and painfully resolved in the 1980s:
"The S&L crisis provides an excellent example of both how to make a problem worse and how to resolve it in the end. (note: I watched this play out in Texas; some of your readers may have a different perspective).
1. Prior to the mid-1970s, S&Ls lived by the 3-6-3 rule – pay depositors 3%; make home loans at 6%; and be on the golf course at 3 o’clock. This cozy little world had been in place since the 1950s.
2. Inflation in the 70s wrecked this calculation. The loans (long term home mortgages) still paid 6%, but the S&L’s were having to pay the depositors more – often more than the 6% they were making on the loans. Bankruptcy loomed.
3. The S&L owners were some of the more prominent local business people, especially in smaller towns scattered across the US – and more importantly, in Congressional districts scattered across the US.
4. They went to Congress and said, "we’re in trouble, but if we could only invest in commercial real estate, we could grow our way out of this mess, and it won’t cost the taxpayer a dime."
5. Congress, faced with a $50 billion problem as well as the prospect of alienating multitudes of prominent local citizens, agreed, and thus kicked the can down the road.
6. At least in Texas, this is when the “cowboys” moved in. The smarter S&L owners saw what was happening and realized the game was up. They sold their institutions to the cowboys (and the smart ones took the highest cash offer, ignoring any stock or profit-sharing).
7. The predictable and well documented abuses took off (“fiduciary pornography” in the words of one regulator afterward).
8. Things went on for a few years but were beginning to unravel even before the Saudis flooded the oil market in early 1986 and drove the price of crude down to $9.
9. Now for what was done right – if only by accident. Texas was the first to tumble, and people in other states remembered our oil boom bumper stickers. “Drive 90 and freeze a Yankee” among others. As a result, there was ZERO sympathy for Texas’ economic problems.
10. Federal regulators thus had a free hand to clean house. Even large banks were declared insolvent. Shareholders lost everything. Over 1000 bank executives went to prison. I personally know at least two who slithered free in the end, but many did not. A lawyer friend spent a couple of years in the late 1980s doing little other than foreclosing houses in Highland Park (old money Dallas).
11. It was a rough 3-4 years in Texas, but two decades of accumulated rot had been burned away, setting the stage for the economic boom that followed.
The other big factor was the tax reform of 1986. People today need to be more cognizant of what really happens when marginal rates go up to 70%. Do the rich pay more tax? NO. Instead the world becomes infested with tax shelters and other avoidance schemes, which produce tremendous waste.
In late 70s/early 80s Texas, a lot of this tax shelter money intersected with the S&L pirates in the form of commercial real estate, especially apartment complexes, in an orgy of malinvestment. I still remember the TV ads in Houston marketing yuppie-villes: gorgeous women in bikinis by the pool, and one unending party. After the bust, these complexes turned into Section 8 housing almost overnight and many remained blighted for a couple of decades before they were finally torn down.
If the next bust starts out affecting only one region, there may be a chance to do the right thing (basically, let her rip and things will settle out on their own). But that didn’t happen in 2008, and probably won’t happen next time."
Thank you, David, for a very insightful summary of how financial crises arise and how the scale of the crisis affects the resolution: in 2008, banking had become so centralized and the fraud/leverage so extreme that the implosion of a relatively marginal slice of the mortgage market (subprime mortgages) triggered a loss of faith and liquidity that very nearly brought down the entire global financial system.
Rather than clean house, politicos bailed out the banks and regulators added new regulations that left the system essentially unchanged. As was easily predictable, the regulations increased the banks' costs and created incentives to move mortgage origination into non-bank (and thus less regulated) entities.
Interestingly, modern financial crises seem to oscillate between fraud and over-reach: the S&L crisis resulted from the commoditization of mortgage fraud, the 2000 dot-com crash resulted from extremes of over-valuation and margin debt, the 2008 Global Financial Meltdown resulted from the globalized commoditization of securitization fraud, and now the pins are being set up for the next financial crisis triggered by extremes of credit and overvaluation.
The dot-com meltdown arose from unprecedented extremes of overvaluation for tech companies profitable and unprofitable alike. High levels of margin debt ensured that the sell-off would gather steam as punters were forced to liquidate portfolios to meet margin calls.
The dot-com meltdown was famously concentrated in the tech sector: while certainly a major part of the economy, tech and the Internet high-flyers were still a relatively modest share of total assets: all stocks, all bonds, all real estate, etc.
Sector rotation enabled capital to be preserved. As the Federal Reserve slashed interest rates, the value of bonds rose and real estate got a boost as assets flowed from stocks to housing. Simply put, not every asset crashed in unison.
The brewing financial crisis will be different: the twin sins of extreme levels of debt and extreme overvaluation of assets now characterize corporate bonds, many sovereign bonds, stocks and real estate. Pretty much the only traditional assets that aren't at nosebleed levels are precious metals and bat guano. (Cryptocurrencies are as yet non-traditional assets, though this may change in the next financial crisis.)
Extreme levels of debt and overvaluation characterize the entire global economy, and are not limited to any one nation or sector. When this crisis gathers steam, there will be few avenues of escape. Adding regulations won't stop it, adding liquidity won't stop it, waving chicken entrails and dancing the humba-humba around the MMT/Keynesian campfire won't stop it.
Attempting to force extremes to even more extended extremes won't stop it.
THREE NOTES OF NOTE:
1. I just added a new benefit for all subscribers/patrons: a monthly Q&A where I respond to your questions/topics. You get other exclusive benefits with a $1, $5 or $10/month patronage via patreon.com.
2. Resistance, Revolution, Liberation: A Model for Positive Change is on sale this month: $4.95 Kindle edition, $9.95 print edition, a 33% discount.
3. Did you know there are 3 new audiobooks available now?
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.
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, Tim B. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

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Posted by Charles Hugh Smith at 6:13 PM

Tuesday, April 16, 2019

The World's Hypocritical Silence as China Imprisons its Ethnic Muslims En Masse

The entire world's ruling elites are silent because they're terrified that even mild murmurings might limit the blood-soaked billions they want to reap from trade with China.
Imagine the reaction in the global Muslim community if a western nation imprisoned hundreds of thousands of Muslims solely for being Muslim and subjected them to torture, "re-education" that amounts to treating their religious faith as a pathological mental illness, forcefully separating parents and children, incarcerating the children in state-run orphanages, and on and on in a ruthlessly efficient Nazi-like systemic oppression.
The Muslim "street" would erupt in mass protests, burning flags and calling for the downfall of The Great Satan, and the Muslim nations would cancel energy and trade contracts and lodge diplomatic protests.
But the global Muslim community, and indeed, the entire global community, is strangely silent as China pursues a high-tech suppression of its ethnic Muslims. This silence might be the one thing Tehran, Moscow and Washington have in common: a complete and utter disregard for China's Muslim-only gulags.
While America's ruling elite greedily rubs its hands over the wealth that will flow from a "trade deal" with China, where is America's vaunted concern with human rights? Nowhere to be found. Where are the canceled energy and trade contracts between China and Iran, Turkey, Pakistan, Egypt, Indonesia, Malaysia, Iraq, Syria, Saudi Arabia, the Persian Gulf States and other Muslim-majority nations?
The entire world's ruling elites are silent because they're terrified that even mild murmurings might limit the blood-soaked billions they want to reap from trade with China. That is the source of the world's hypocritical silence about China's Muslim-only gulags: the endless, insatiable, boundless greed of the ruling elites.
There's a funny little thing called karma, or blowback if you prefer a secular label, and both China and its vast host of global ruling-elite enablers will eventually reap what they are sowing.
China employs vast armies of propagandists in the West whose favorite word is "debunked." You can easily identify a Beijing-propaganda proxy by their use of "debunk" to counter any criticism of China's Muslim-only gulags.
Meanwhile, the alarming reality has been covered in depth by what little remains of the global free press. If you look at only one article, start with this photo-essay: How China Turned a City into a Prison (New York Times)
Satellite images show expansion of ‘re-education’ centers in China’s Xinjiang region China has sharply expanded an internment program that initially targeted ethnic Uighur extremists but is now confining vast numbers of the largely Muslim minority group, including the secular, old and infirm, in camps across the country’s northwest.
Up to one million people, or about 7% of the Muslim population in China’s Xinjiang region, have now been incarcerated in an expanding network of 'political re-education' camps, according to U.S. officials and United Nations experts.
China Is Treating Islam Like a Mental Illness The country is putting Muslims in internment camps—and causing real psychological damage in the process.(TheAtlantic.com)
THREE NOTES OF NOTE:
1. I just added a new benefit for all subscribers/patrons: a monthly Q&A where I respond to your questions/topics. You get other exclusive benefits with a $1, $5 or $10/month patronage via patreon.com.
2. Resistance, Revolution, Liberation: A Model for Positive Change is on sale this month: $4.95 Kindle edition, $9.95 print edition, a 33% discount.
3. Did you know there are 3 new audiobooks available now?
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.
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, Tim B. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

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Posted by Charles Hugh Smith at 7:45 PM

Monday, April 15, 2019

Notre Dame and the Identity of France

These are not matters solely of politics and finance; they are manifestations of the elite war on the identity of France.
As rationalists, we're supposed to take the dramatic and profoundly tragic fire at Notre Dame Cathedral in Paris as random chance or bad luck. But I cannot be the only one who feels a symbolic tie between the near-destruction of a French religious and cultural icon and the embattled identity of France.
As it happens, I am reading Fernand Braudel's massive two-volume history The Identity of France: Volume One: History and Environment and Volume Two: People and Production.
Longtime readers know I have often recommended Braudel's three-volume history, Civilization and Capitalism, 15th-18th Century, as essential to the understanding of the rise of Capitalism in Europe:
The Chinese famously view natural disasters and similar events as portents of political change, as disasters suggest the Emperor/ruling elite has lost the Mandate of Heaven. It is difficult not to see the disastrous fire in Notre Dame as just such a portent.
For the identity of France is under assault on a number of fronts. The left-leaning status quo has set up a false duality: one either worships multiculturalism and rejects a national identity as the sworn enemy of multiculturalism, or one is a rightist racist. Thus anyone who even refers to a national identity of France is quickly vilified and marginalized.
This is of course a false choice: one can value multiculturalism as an essential part of a national identity without sacrificing the entire notion of a national identity.
As Braudel notes at the end of Volume Two, France has long been ruled by tiny elites. A mere 242 financiers held contracts to collect taxes for the monarchy in the early 1700s; Braudel notes that "La Haute Banque in Paris, during the Restoration and later, consisted of a mere 25 families."
In the highly centralized political power structure of today's France, the leadership--from Macron down-- are all graduates of a few select universities. Like Macron, the leadership was selected early and quickly advanced over lesser elites.
Globalized, hyper-financialized elitist Capitalism, so dependent on cheap immigrant labor for its servants, has left "deep France" behind, stripped of economic and political power, and relegated to dependency on the welfare state in rural regions (only the favored few and those with state-subsidized housing can afford to live in Paris).
These are not matters solely of politics and finance; they are manifestations of the elite war on the identity of France, to transform it into a bland, globalized hierarchy in which capital and power benefit the few, a system enforced by state propaganda and public virtue-signaling.
To quote Slavoj Žižek:
"The yellow vests movement fits the specific French Left tradition of large public protests targeting the political, more than the business or financial, elites. However, in contrast to the 68’ protests, the yellow vests are much more a movement of France profonde ('deep France'), its revolt against big metropolitan areas, which means that its Leftist orientation is much more blurred."
Here is Andrew Joyce (On Yellow Vests and Monsters):
"Amidst the sea of evasions, disavowals, and contradictions, it remains the case that the White working class has been abandoned by both the Old Right and the Left. In some cases, the White working class is the reason for the same evasions, disavowals, and contradictions: they are an uncomfortable, and now more visible, reminder of broken promises and unfulfilled obligations.
Guilluy adds that 'the economic divide between peripheral France and the metropolises illustrates the separation of an elite and its popular hinterland. Western elites have gradually forgotten a people they no longer see. The impact of the gilets jaunes, and their support in public opinion (eight out of 10 French people approve of their actions), has amazed politicians, trade unions and academics, as if they have discovered a new tribe in the Amazon.'
I disagree that visibility, presented in passive terms, is the key issue here. In fact, I believe a better analogy would be that of an Amazonian tribe that had been systematically targeted for extinction, and was assumed to have been incapable of mustering any kind of resurgence.
We shouldn’t forget that it became common practice on the Left to pretend the White working class didn’t exist, and that it was also viewed as explicitly oppositional on the Left and among cosmopolitan elites to offer the White working class, as an ethno-economic group, any kind of material or ideological support."
Lastly, here is Christophe Guilluy, author of Twilight of the Elites: Prosperity, the Periphery, and the Future of France:
Employment and wealth have become more and more concentrated in the big cities. The deindustrialised regions, rural areas, small and medium-size towns are less and less dynamic. But it is in these places – in peripheral France (one could also talk of peripheral America or peripheral Britain) – that many working-class people live. Thus, for the first time, “workers” no longer live in areas where employment is created, giving rise to a social and cultural shock. … The globalised metropolises are the new citadels of the 21st century – rich and unequal, where even the former lower-middle class no longer has a place. Instead, large global cities work on a dual dynamic: gentrification and immigration. This is the paradox: the open society results in a world increasingly closed to the majority of working people."
The corporate media, a key defender of the self-serving elite, will reject any symbolism in the near-destruction of Notre Dame. But deep down, many sense what cannot be spoken openly: the elites in France have lost the Mandate of Heaven.
THREE NOTES OF NOTE:
1. I just added a new benefit for all subscribers/patrons: a monthly Q&A where I respond to your questions/topics. You get other exclusive benefits with a $1, $5 or $10/month patronage via patreon.com.
2. Resistance, Revolution, Liberation: A Model for Positive Change is on sale this month: $4.95 Kindle edition, $9.95 print edition, a 33% discount.
3. Did you know there are 3 new audiobooks available now?
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.
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, Tim B. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

Read more...
Posted by Charles Hugh Smith at 9:21 PM
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