The Implicit Desperation of China's "Social Credit" System

Other governments are keenly interested in following China's lead.

I've been pondering the excellent 1964 history of the Southern Song Dynasty's capital of Hangzhou, Daily Life in China on the Eve of the Mongol Invasion, 1250-1276 by Jacques Gernet, in light of the Chinese government's unprecedented "Social Credit Score" system, which I addressed in Kafka's Nightmare Emerges: China's "Social Credit Score".

The scope of this surveillance is so broad and pervasive that it borders on science fiction: a recent Western visitor noted that train passengers hear an automated warning on certain lines, in Mandarin and English, that their compliance with regulations will be observed and may be punished via a poor social score.

Taking the train in China is like stepping into an episode of ‘Black Mirror’ (via GFB)

Inside China’s Dystopian Dreams (NYT)

China has turned Xinjiang into a police state like no other (The Economist)

In the Song Dynasty, arguably China's high water mark in many ways (before the Mongol conquest changed China's trajectory), social control required very little force. The power of social control rested in the cultural hierarchy of Confucian values: one obeyed the family's patriarch, one's local rulers and ultimately, the Emperor.

Author Edward Luttwak made the distinction between force and power in his fascinating book The Grand Strategy of the Roman Empire: From the First Century CE to the Third: power is persuading people to cooperate, force is making them obey.

Power is people choosing of their own accord to comply, for reasons they find sound and that serves their self-interest; there is little need for the application of force.

Power is highly leveraged; a relatively small police/military and judiciary is all that's needed. Force, in contrast, doesn't scale: it's enormously costly in capital and labor to monitor an entire populace and impose control and obedience.

While the Song Dynasty had a police force, a judiciary and an army, the populace generally managed itself via an internalized secular religion that placed the father, civil authorities and the Imperial state at the top of a natural order that enabled the harmony of Heaven and Earth. To disobey would be to threaten the harmony that served everyone.

In the early days of the Communist revolution (1949 to 1965), the majority of China's populace embraced the values and authority of the Communist regime, despite the monumental hardships and setbacks of the Great Leap Forward (millions dying needlessly of starvation) and other centralized incompetencies.

But the Cultural Revolution that was launched with Mao's blessing in 1966 was only embraced by the youthful Red Guards. The rest of the society had to be monitored and forced to comply with the mercurial injustices and arbitrary nature of the Cultural Revolution, which imprisoned millions of China's most accomplished citizens in various forms of forced deprivation: house arrest (the most mild); forced relocation to rural labor, re-education (i.e. torture) and imprisonment. Many were killed without even the semblance of a judicial process.

In broad brush, the Cultural Revolution broke the social power of the Communist Party and government. Thereafter, the Party and the state only had force at their disposal.

The rise of broadly distributed prosperity (Deng's "to get rich is glorious") replaced the failed power of Communist ideology with a new social contract:obey the party and the state and you'll become prosperous.

If this new contract were considered rock-solid power, why would China's government need the vast surveillance system they're putting in place for fine-grained control of the populace?

It suggests to me that the leadership (Xi and his cabal) are aware that the prosperity is not permanent, nor is it being distributed evenly enough to harmonize Heaven and Earth. Sensing their lack of social power, they are turning to technology to create a vast system of coercion (force).

Force is not a substitute for power. For this reason, the "Social Credit Score" system smacks of desperation. But China's history is clear: the culture and the people prefer a system in which power is maintained through social norms, not force. With Communist ideology a dead force, and prosperity about to wither, what's left? A system of forced obedience backed by Orwellian technology.

Other governments are keenly interested in following China's lead. "Prosperity" isn't just phantom and asymmetrically distributed in China; it's phantom and asymmetrically distributed almost everywhere, and so other governments are just as desperate to protect their elites and control their restive populaces.

Chinese-style 'digital authoritarianism' grows globally

Centralized force has limits. Like everything else we reckon has god-like powers, it works until it doesn't.

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Understanding the Global Recession of 2019

Isn't it obvious that repeating the policies of 2009 won't be enough to save the system from a long-delayed reset?

2019 is shaping up to be the year in which all the policies that worked in the past will no longer work. As we all know, the Global Financial Meltdown / recession of 2008-09 was halted by the coordinated policies of the major central banks, which lowered interest rates to near-zero, bought trillions of dollars of bonds and iffy assets such as mortgage-backed securities, and issued unlimited lines of credit to insolvent banks, i.e. unlimited liquidity.

Central governments which could do so went on a borrowing / spending binge to boost demand in their economies, and pursued other policies designed to bring demand forward, i.e. incentivize households to buy today what they'd planned to buy in the future.

This vast flood of low-cost credit and liquidity encouraged corporations to borrow money and use it to buy back their stocks, boosting per-share earnings and sending stocks higher for a decade.

The success of these policies has created a dangerous confidence that they'll work in the next global recession, currently scheduled for 2019. But policies follow the S-Curve of expansion, maturity and decline just like the rest of human endeavor: the next time around, these policies will be doing more of what's failed.

The global economy has changed. Demand has been brought forward for a decade, effectively draining the pool of future demand. Unprecedented asset purchases, low rates of interest and unlimited liquidity have inflated gargantuan credit / asset bubbles around the world, the so-called everything bubble as most asset classes are now correlated to central bank policies rather than to the fundamentals of the real-world economy.

Keenly aware that they've thinned their policy options and financial buffers to near-zero, central banks are struggling to normalize their policies by raising rates, reducing their balance sheets by selling assets and tightening lending conditions / liquidity.

Unfortunately for central banks, global economies are now junkies addicted to zero interest rates and central bank stimulus / support of bond markets, stock markets and real estate markets. The idea of normalization is to slowly inch the financial system and economy back to levels that were normal in previous eras, levels that allowed some room for central banks to respond to recessions and global financial crises by lowering rates and extending credit to insolvent lenders.

But reducing the drip of financial heroin hasn't ended global economies' addiction to extraordinary easy financial conditions. Rather, it's illuminated the dangers of their continued addiction.

As soon as authorities attempt to limit their support / stimulus, markets wobble into instability. The entire economic structure of "wealth" is now dependent on asset bubbles never popping, for any serious decline in asset valuations will bankrupt pension funds, insurers, local governments, zombie companies and overleveraged households--every entity which is only solvent as long as asset bubbles expand or maintain current valuations.

So how do central banks normalize their unprecedented policies without popping the asset bubbles they've created? The short answer is: they can't.Rising interest rates are a boon to savers and Kryptonite to borrowers--especially over-leveraged borrowers who must roll over short-term debt and borrow more just to maintain the illusion of solvency.

As if this wasn't enough to guarantee recession in 2019, there's the unintended consequences of capital flows. Capital famously flows to where it's treated best, meaning wherever it earns the highest yields at the lowest risk, and where the rule of law protects capital from predation or expropriation.

When all central banks pursued roughly the same policies, capital had options. Now that the Fed has broken away from the pack, capital has only one option: the U.S. The Federal Reserve should have begun normalizing rates etc. back in 2013, and if they'd been wise enough to do so then even baby steps over the past 5 years would have led to a fairly normalized financial environment.

But Ben Bernanke and Janet Yellen blew it, so it's been left to the current Fed leadership to do the heavy lifting over a much shorter timeline. Predictably, pulling away the punch bowl has spoiled the asset-bubble party, and now all the asset bubbles are increasingly at risk of deflating.

But the yields and relative risk available in US-dollar denominated assets is starting to look a lot more attractive and lower risk than assets denominated in yen, yuan and euros. Capital flows tend to be self-reinforcing: as capital flows out of at-risk economies, it dampens investment, speculation and spending as the economy is drained of capital.

Owners of assets notice this decay and so they decide to sell and move their capital to safer ground. Selling begets selling, and pretty soon nobody's left to catch the falling knife, ie. buy assets that are rapidly losing value.

This is what surprised Alan Greenspan (by his own account) in 2008: bubbly markets quickly become bidless, that is, buyers vanish and sellers who want to unload their assets for cash find nobody's willing to part with cash for a plummeting asset.

The central bank "solution" to bidless markets is to become the buyer of last resort: when no sane investor will buy bonds, stocks or real estate, then the central bank starts buying everything in sight.

We are already seeing this in action as Chinese governmental agencies have started quietly buying empty flats in ghost buildings to prop up the housing market. The idea here is to restore confidence with a relatively modest burst of quiet buying. But when markets turn and confidence is lost, sentiment can't be restored so easily: sensing their last chance is at hand, sellers dump assets at a quickening pace, overwhelming the modest central bank buying.

This leaves the central bank with a stark and sobering choice: either let the asset bubble collapse and accept the immense destruction of "wealth," or buy the whole darn market. This is the unintended consequence of employing unprecedented policies for a decade: like using antibiotics every day for years, eventually resistance develops and the "fix" no longer works.

Now that central banks have inflated assets into the stratosphere, there's $300 trillion in global financial assets sloshing around seeking higher yields and capital gains. How much of this $300 trillion can central banks buy before they destabilize currencies? How much can they buy before they run out of political goodwill?

Isn't it obvious that repeating the policies of 2009 won't be enough to save the system from a long-delayed reset?

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition.

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Why Are so Few Americans Able to Get Ahead?

Our entire economy is characterized by cartel rentier skims, central-bank goosed asset bubbles and stagnating earned income for the bottom 90%.

Despite the rah-rah about the "ownership society" and the best economy ever, the sobering reality is very few Americans are able to get ahead, i.e. build real financial security via meaningful, secure assets which can be passed on to their children.

As I've often discussed here, only the top 10% of American households are getting ahead in both income and wealth, and most of the gains of these 12 million households are concentrated in the top 1% (1.2 million households). (see wealth chart below).

Why are so few Americans able to get ahead? there are three core reasons:

1. Earnings (wages and salaries) have not kept up with the rising cost of living.

2. The gains have flowed to capital, which is mostly owned by the top 10%, rather than to labor ((wages and salaries).

3. Our financialized economy incentivizes cartels and other rentier skims, i.e. structures that raise costs but don't provide any additional value for the additional costs.

It's instructive to compare today's household with households a few generations ago. As recently as the early 1970s, 45 years ago, it was still possible for a single fulltime-earner to support the household and buy a home, which in 1973 cost around $30,000 (median house price, as per the St. Louis FRED database).

As recently as 20 years ago, in 1998, the median house price in the U.S. was about $150,000-- still within reach of many two-earner households, even those with average jobs.

As the chart below shows, real median household income has only recently exceeded the 1998 level-- and only by a meager $1,000 annually. If we use real-world inflation rather than the under-estimated official inflation, real income has plummeted by 10% or more in the past 20 years.

This reality is reflected in a new study of wages in Silicon Valley, which we might assume would keep up due to the higher value of the region's output.The study found the wages of the bottom 90% declined when adjusted for inflation by as much as 14% over the past 20 years:

"The just-released report showed that wages for 90 percent of Silicon Valley workers (all levels of workers except for the top 10 percent) are lower now than they were 20 years ago, after adjusting for inflation. That's in stark contrast to the 74 percent increase in overall per capita economic output in the Valley from 2001 to 2017."

source: Why Silicon Valley Income Inequality Is Just a Preview of What's to Come for the Rest of the U.S.

Meanwhile, the median house price has more than doubled to $325,000 while median household income has stagnated. Please note this price is not adjusted for inflation, like the median income chart. But if we take nominal household income in 1998 (around $40,000 annually) and compare it to nominal household income now in 2018 (around $60,000), that's a 50% increase--far below the more than doubling of house prices.

To raise stagnant incomes, the Federal Reserve and other central banks have attempted to generate a wealth effect by boosting the valuations of risk-on assets such as stocks, bonds and commercial real estate. But the Fed et al. overlooked the fact that the vast majority of these assets are owned by the top 10%--and as noted above, the ownership of the top 10% is concentrated in the top 1% and .1%.

As a result, the vast majority of the wealth effect capital gains have flowed to the top 1%:

Lastly, the cartel structure of the U.S. economy has raised costs while providing no additional value. One example is higher education, a cartel that issues diplomas with diminishing economic value that now cost a fortune, a reality reflected in this chart of student loan debt, which simply didn't exist a generation ago:

Our entire economy is characterized by cartel rentier skims, central-bank goosed asset bubbles and stagnating earned income for the bottom 90%.Given these realities, the bottom 90% are left with few pathways to get ahead in terms of financial security and building secure family wealth.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

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Is This "The Most Important Election of our Lives" or Just Another Distraction?

The problem isn't polarization; the problem is neither flavor of the status quo is actually solving any of the nation's most pressing system problems.

As I write this at 5 pm (Left Coast) November 6, the election results are unknown. While various media are trumpeting this as "the most important election of our lives," the less eyeball-catching, emotion-triggering reality is this election is nothing but another distraction. No matter who "wins," none of our systemic problems will be addressed, much less solved.

Does either party have the will or coherent grasp of what's broken to fix America's healthcare mess? No. The Democrats' "solution" is to take the bloated, ineffective Medicare system that incentivizes blatant fraud, overbilling and profiteering and increase the sickcare cartels' power and profits via "Medicare for All."

This is akin to giving defense contractors the power to set the Pentagon budget. Oh, wait, they already have that power.

In the exact same fashion, Medicare's soaring budget is set by profiteering' cartels. Nothing will change in "Medicare for All" except taxes will go up and the cartels will skim additional billions in rentier profits.

The Republican solution is to call quasi-monopolies and cartels "markets."Since turning everything into a market solves all problems, that's the "market-based "solution." But since healthcare is run by cartels, which fix the "market" to their own benefit, there really is no "market" in healthcare, and nobody's interested in establishing one because that would crater cartel profits.

As I've noted many times, our dysfunctional healthcare will bankrupt the nation all by itself. Sickcare Will Bankrupt the Nation--And Soon (2011)

U.S. Healthcare Isn't Broken--It's Fixed (May 16, 2018)

How about a systemic solution for opioid addiction? If you believe either party has a solution," you need to reduce your Ibogaine intake. Opioids and other addictions (like social media and mobile phones) are immensely profitable and so the cartels and monopolies profiting from addictions fund politicos in both parties to insure their profits aren't reduced.

How about a dysfunctional weapons procurement system? Both parties love trillion-dollar weapons programs as long as the money sluices into enough Congressional districts. So what if the weapon system is defective, already outdated, poorly designed, the wrong system for the challenges ahead or simply not cost-effective-- as long as the campaign contributions are gushing into D.C. and politicos can brag about "jobs" created by building failed weaponry, nothing will change. The Pentagon can beg Congress to stop building the darn thing and the Pentagon will be ignored: there's simply too much money at stake to care whether it actually serves military needs.

How about soaring debt loads on every sector of the economy? Money that goes to pay interest can't be invested or spent elsewhere, and that starves the economy of productive investment. The super-wealthy own much of the debt and receive much of the interest income. This is a systemic problem that isn't viewed as a problem because the super-wealthy own the political process.

The "solution" to crushing student loan debt ($1.4 trillion and counting) is to transfer the entire debt to the taxpayers, meaning the federal government issues another $1.4 trillion in debt to pay the super-wealthy who own all the student loans. Nice for the super-wealthy and politicos, not so nice for future taxpayers burdened with trillions more in debt.

Neither party can accept that higher education is a failed, dysfunctional system. And so the "solution" is borrow another couple trillion and pay interest to the super-wealthy who own the debt, all for an "education" that often has little value in either the economy or the debt-serf students' lives.

The problem isn't polarization; the problem is neither flavor of the status quo is actually solving any of the nation's most pressing system problems. This is why we're coming apart at the seams: problems are being left unaddressed and so they only become more entrenched and destructive.

My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

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Read the first section for free in PDF format.


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Turn Off, Tune Out, Drop Out

An unknown but likely staggeringly large percentage of small business owners in the U.S. are an inch away from calling it quits and closing shop.

Timothy Leary famously coined the definitive 60s counterculture phrase, "Turn on, tune in, drop out" in 1966. (According to Wikipedia, In a 1988 interview with Neil Strauss, Leary said the slogan was "given to him" by Marshall McLuhan during a lunch in New York City.)

An updated version of the slogan might be: Turn Off, Tune Out, Drop Out: turn off mobile phones, screens, etc.; tune out Corporate Media, social media, propaganda, official and unofficial, and drop out of the status quo economy and society.

Dropping out of a broken, dysfunctional status quo in terminal decline has a long history. The chapter titles of Michael Grant's excellent account of The Fall of the Roman Empire identify the core dynamics of decline:

The Gulfs Between the Classes

The Credibility Gap

The Partnerships That Failed

The Groups That Opted Out

The Undermining of Effort

Our focus today is on The Groups That Opted Out. In the decline phase of the Western Roman Empire, people dropped out by abandoning tax-serfdom for life in a Christian monastery (or as a worker on monastery lands) or by removing themselves to the countryside.

Today, people drop out in various ways: early retirement, disability or other social welfare, homesteading or making and saving enough money in the phantom-wealth economy that they can quit official work in middle age.

We can see this in the labor participation rates for the populace at large, women and men. The labor participation rate reflects the percentage of the population that's in the workforce, either working or actively looking for work.

That the number of people in the workforce has declined significantly is well-known. The US Census pegs the number of people 'not in the labor force' at 95 million.This includes people who are disabled, in school, etc., so the number should be taken with a grain of salt. But the decline in the relative size of the labor force is remarkable:

Interestingly, the labor participation rate for women has held steady compared to the entire populace.

Now compare it to the labor participation rate for men, which has absolutely cratered:

The difference between genders is striking. Gender roles in society and the economy are clearly causal factors. Many have speculated that the decline in traditional strongholds of male employment such as manufacturing explain the decline of males in the workforce. As for the high participation of women, we might speculate that being caregivers for children and elderly parents requires earning an income, and as these responsibilities continue to fall more heavily on females, it may be that fewer women have the option of dropping out.

As for turning off, consider this account of tech overlords turning off their own childrens' access to screens (via GFB): A Dark Consensus About Screens and Kids Begins to Emerge in Silicon Valley “I am convinced the devil lives in our phones.”

I've written about mobile phone and social media addiction many times, so the reluctance of tech elites to let their own children suffer the ravages of digital addiction isn't surprising.

As for tuning out, the strident voices of political polarization are not as widespread as generally perceived: Hidden Tribes: A Study of America’s Polarized Landscape found that the rabidly leftist / "progressive" tribe is a mere 8%, and their opposite tribe on the right is equivalently modest in number.

It doesn't take much observation to surmise that the majority in the middle are tuning out both polarizing extremes. Partisans may view this abandonment as negative, i.e. apathy, but this would be misreading the situation: the reality is the majority are tired of the poisonous polarities and the stultifying, going-nowhere toxic frenzy that destroys participants' equilibrium and sanity.

An unknown but likely staggeringly large percentage of small business owners in the U.S. are an inch away from calling it quits and closing shop. At some point the ever-higher costs of burdensome, mostly useless bureaucratic compliance and complexity, the ever more costly junk fees, filing fees, permits, penalties and taxes, the higher costs of labor overhead (healthcare insurance, workers comp, etc.) and the ever-rising costs of materials and services make it an easy decision to drop out of the rat race and either sell the business to someone less grounded in reality or just close it down.

Those who tire of being nailed by "tax the rich" schemes can drop out by earning less. Sell out, move out, drop out. Unfortunately for all those who depend on the Savior State, the state cannot force people losing money and their mental health to continue operating enterprises. (At least not yet.) Once small business and the productive wealthy (i.e. upper middle class) sell out, move out and drop out, it's game over for the "tax the rich" crowd and the local economy.

Dropping out is an increasingly attractive option. For those unable to drop out,turning off and tuning out are increasingly attractive options.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

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.

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