Friday, January 17, 2020

If Promoting Wealth Inequality and Social Breakdown Is Evil, The Fed Is Evil

The Fed will destroy the nation by widening the wealth/income inequality that is breaking down the nation's social order.
President Reagan was widely mocked in America when he declared the Soviet Union an evil empire, but this calling things by their real name had a profound impact in the Eastern Bloc. The mockery stemmed from the secularized American view that there was precious little moral difference between the USSR and the US, that the USSR was a legitimate "alternative system," and that ramping up Cold war tensions was not just dangerous but useless, as the USSR was as permanent (or more so) than the US.
None of which turned out to be true. While all nation-states harbor multitudes of sins, the Soviet Empire was unique in its mass suppression of basic human rights, its economic failure to better the lives of its imprisoned populations while its military might soared, and the perverse union of a Kafkaesque bureaucracy and an Orwellian propaganda machine epitomized by the old Soviet-era joke that "we pretend to work and they pretend to pay us."
Fast-forward to today's USA where soaring wealth and income inequality is making a social breakdown all but inevitable. Wages for the majority of households have gone nowhere for the past two decades, while the incomes of the top 5% have skyrocketed, with the majority of the gains flowing to the top 0.1%. (See charts below.)
History shows that fast-widening gaps between the super-wealthy / top 5% and the rest of the citizenry inevitably generate social disorder and breakdown. This dynamic is already painfully visible in rising homelessness, suicide rates, opioid addictions, burnout, intolerance, etc.
While there are many dynamics in play that exacerbate wealth / income inequality, the primary driver is the Federal Reserve's near-infinite giveaways to the financial and corporate elites. If we examine why our economy has become a winner take most casino, we find the gaming tables are rigged to favor the few closest to the Fed's money spigots: when JP Morgan gets in trouble by leveraging socially parasitic bets, the Fed steps in and saves their gambles by printing hundreds of billions of dollars in repos.
As a result of the Fed backstop, JP Morgan reported blow-out earnings.
The net result of the Fed's goosing the stock market ever higher is soaring wealth inequality as the average US household gains precious little from record highs, and whatever gains they might have are sequestered in 401Ks and IRAs until they retire.
The Fed justifies its enrich the already rich policies by claiming some of this newly created wealth will trickle down to the masses via walking the wealthy's dogs, polishing their Mercedes, tutoring their over-scheduled kids, busing their tables at $100 per plate bistros and so on.
The stagnant wages of the masses are the trickle down. Average Carlos and Carlita don't get an unlimited line of credit from the Fed; only bankers, financiers and corporations get an unlimited line of credit from the Fed.
If an alien force was purposefully widening America's wealth / income gap to destabilize the nation's social order, would we hesitate to call this force evil? Would we rationalize this force as "no worse than any other force" and an "alternative system" with the same moral standing as free markets and democracy?
Ours is a moral universe, and the first necessary step is to call things by their real name: the Fed is evil. Any force that relentlessly promotes fast-widening wealth / income inequality, knowing full well that the inevitable result is social breakdown, is evil.
If this force were external, its evil nature would not be denied or defended. But because the Fed favors the wealthy and powerful, it masks its evil behind an Orwellian cloak of PR much like the former USSR.
The parallels with the Evil Empire don't stop there. While the Fed pillages the vast majority of Americans and diverts the nation's wealth to the top 0.1%, it claims, absurdly and speciously, to be "helping the commoner." This is as Orwellian as it gets.
The Fed will destroy the nation by widening the wealth/income inequality that is breaking down the nation's social order. Let's call things by their real name: the Fed is evil.



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Posted by Charles Hugh Smith at 10:22 AM

Wednesday, January 15, 2020

No Matter How Much Money the Fed Prints, We Still Can't Afford Nice Things

When will the American wage-earner finally tire of the skims, scams, fraud and lies that are now the foundations of everyday life?
You'd think that with the Federal Reserve printing trillions of dollars since 2008, we'd all be able to afford nice things. But you'd be wrong: after 11 years of Fed money-printing, nice things are even more out of reach for all but the favored few who've received the Fed's bounty of freshly created currency.
The Fed's trillions were supposed to trickle down into the real economy, but they never did. All those trillions boosted asset prices and the wealth of the $100 million yachts and private jets elite.
Instead costs have soared while wages have stagnated. If this widening gap between wages and costs were accurately presented, there would a political revolt against the Fed and those few who have benefited so immensely from Fed money-printing: the banks, financiers, corporations buying back their own shares, the owners of high-frequency trading computers, etc.
Despite the best efforts of the government's "suppress all evidence of runaway cost inflation" functionaries, a few facts have slipped through. Let's start with income from 1980 to the present, as per the Congressional Budget Office (CBO). Note that this is all pre-government-transfer (Social Security, food stamps, etc.) income, both earned (wages) and unearned (investment income).
The top households have done very, very well in the past 20 years of Fed largesse, while the incomes of the bottom 80% have gone nowhere.
Meanwhile, big-ticket costs of living such as rent have skyrocketed: so how do we buy nice things if our wages are stagnant but the cost of essentials is rising? We borrow more money.
Exhibit A for borrowing trillions of dollars to afford nice things is student loan debt. A college degree has long been worshiped as the ultimate Nice Thing everyone who aspires to middle class Nice Things must have, and thanks to cartels and financialization, student debt-serfs now labor under a crushing load of debt:
Healthcare is also a Nice Thing that is no longer affordable. Wages nudge up a few pennies while healthcare costs continue soaring.
A new vehicle is another Nice Thing that's increasingly out of reach unless you borrow a small fortune. My colleague Bill Rice Jr. did the grunt work of comparing apples to apples on the least expensive autos and discovered a massive divergence between "official inflation" and real-world inflation: according to the BLS, inflation in the category of "New Vehicles" has been practically non-existent for decades, while the real-world cost of new autos has risen by over 200%. No, Autos Are Not "Cheaper Now" (June 28, 2019)
Yes, autos are safer, but are they "better"? Just wait until the electronic motherboard of your Nice Thing vehicle goes out and the repair bill totals thousands of dollars. There goes your "rainy day fund" if you have one, and few do.
The real-world costs are masked or buried until The Moment of Truth: the co-pays of your healthcare are arcane and obscure until the soul-crushing bill arrives, and then your next stop is bankruptcy court.
Meanwhile, the financial assets of the Fed's Favored Few have grown to the point that they now dominate the economic and political order. Corporations can borrow billions to buy back their own shares, further enriching the already-rich, while in the real world we watch other shoppers returning items to the supermarket shelves--they're no longer affordable and so the customer has to put the Nice Thing back on the shelf.
While Apple stock soars to new heights, those outside the the Fed's Favored Few are happy to get a 5-year old hand-me-down iPhone since their old iPhone or Windows OS phone died.
While Mr. Softee (Microsoft) stock soars to new heights, tens of millions of their customers with Windows 7 computers received a notice that Microsoft will no longer support Windows 7, and Mr. Softee "recommends" buying a new computer with Windows 10. Windows 7 is a perfectly adequate operating system, but like the rest of America's tottering economy, "growth" comes only as a result of planned obsolescence, not actual improvements.
When will the American wage-earner finally tire of the skims, scams, fraud and lies that are now the foundations of everyday life? Probably never, until the toll is paid in failed health and breakdown. Tax donkeys and debt-serfs can be whipped to continue for only so long, and then they break down and cannot go on any longer. The trickle of tax donkeys and debt-serfs who can no longer go on will swell to a flood, and the Fed's Favored Few will finally face the life-changing consequences of the Fed's lopsided giveaway to the super-wealthy.


My recent books:
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Posted by Charles Hugh Smith at 9:41 AM

Tuesday, January 14, 2020

Instability Rising: Why 2020 Will Be Different

In 2020, increasing monetary and fiscal stimulus will be the equivalent of spraying gasoline on a fire to extinguish it.
Economically, the 11 years since the Global Financial Crisis of 2008-09 have been one relatively coherent era of modest growth, rising wealth/income inequality and coordinated central bank stimulus every time a crisis threatened to disrupt the domestic or global economy.
This era will draw to a close in 2020 and a new era of destabilization and uncertainty begins.
Why will all the policies that have worked so well for 11 years stop working in 2020?
All the monetary/fiscal policies of the past decade were simply extreme versions of tried-and-true policies that central banks and governments have used for the past 75 years to restore growth in a recession or financial crisis: lower interest rates, increase credit/liquidity, and ramp up government spending (i.e. deficit spending) to compensate for declining private-sector spending.
These policies were designed to be short-term stimulus programs to jump-start the economy out of a slowdown (recession), which typically lasted between 9 and 18 months.
These policies are now permanent, as the system is now dependent on these policies. Any reduction in central bank stimulus causes a market crash (witness the 20% drop in 2018 as the Fed slowly raised interest rates from near-zero) and any reduction in deficit spending threatens to trigger a recession.
The problem is that these policies create distortions that cannot be fixed with more of what caused the distortions in the first place: more extreme monetary and fiscal stimulus.
Systemic distortions include:
A. Soaring wealth-income inequality across the entire global economy.
B. Dependence on asset bubbles to generate the "wealth effect" that encourages spending by the top 5% who own two-thirds of the assets bubbling higher.
C. Dependence on asset bubbles to generate capital gains and property tax revenues for state/local governments.
D. Loss of cost discipline: the solution across the entire spectrum--government, corporate and household--is now to borrow more, not trim costs via innovation or increases in productivity and efficiency.
E. Reliance on debt to fund spending leads to rising defaults which will collapse the system. (Soaring auto-loan defaults are the canary in the coal mine.)
F. Zero interest rates have generated over-capacity/over-production as everyone seeks a return on capital by expanding market share. Now there are global gluts in everything from autos to natural gas to electronics.
G. With the yield on savings now less than zero due to inflation, investors must gamble in the asset-bubble casino as this is only available way to earn a return.
H. Buffers are thinning. I've discussed this in depth over the years; dependence on stimulus lowers systemic resilience, rendering the entire system increasingly vulnerable to a phase-shift that fatally destabilizes the system.
I. Prior to the 2008-2019 era, the "real economy" of sales, wages and profits led the stock market. Now the stock market dominates the real economy, as the central banks have turned the stock market into the 'signaling device' that all is well and the source of bringing demand forward (i.e. the wealth effect).
In Mohammed El-Erian's words: "The Fed can't pull back because it's worried it will disrupt markets that can be a spillover on the economy. The Fed's in a lose, lose, lose situation, they can't stay where they are, they can't do more, they can't do less."
In Andy Xie's words: "The Fed has gone from the financial bubble's hostage to its guardian."
J. There are limits on encouraging more borrowing by lowering interest rates to zero. Even at zero interest rates, income must be devoted to paying principal. At some point, all available income is already consumed in debt service. Anecdotally, we're already there: zombie corporations (that only survive by increasing their debt loads) are becoming more numerous, and households burdened with student loans, auto loans, credit cards and mortgages cannot afford more debt even at zero interest.
Policy makers are now trapped. Unable to reverse the policies that have created the distortions lest that crash the system, they only have two responses, neither of which actually address the distortions undermining the system:
1) push extremely distorting policies to new extremes, or
2) attempt policy-tweaks--higher taxes on the wealthy, etc.--that ignore the causes of the distortions. These policy tweaks are the classic "band-aids treating cancer."
The abject failure of these policies (short-term turned into permanent, with all the resulting long-term distortions) is now visible to all, and we're seeing articles in the most influential mainstream media outlets questioning the current versions of global capitalism; for example, the new issue of Foreign Affairs magazine is devoted to The Future of Capitalism, an implicit confirmation that the current version, dependent on extremes of debt, speculation and stimulus, has no future.
Is there a way out? No. That these policies have not restored "organic growth" (i.e. growth that isn't dependent on zero interest rates, speculative bubbles and tens of trillions of dollars in permanent stimulus) must be accepted, along with the need for a painful re-set.
The odds of this happening are near-zero, as politicians who cause economic pain lose the support of the populace.
This leaves us with the pain of ever-greater distortions, which will drive economic instability, fragmentation, social disorder and financial crashes.
Inherently unstable systems can appear stable for quite some time as the instability builds beneath the placid surface.
In 2020, increasing monetary and fiscal stimulus will be the equivalent of spraying gasoline on a fire to extinguish it. These two charts summarize the disastrous consequences of permanent monetary stimulus: wages' share of the economy are in relentless decline, while the equally relentless rise of financialization has generated soaring wealth / income inequality that increasingly threatens to rip our society and economy to shreds.
This essay was drawn from the Musings Reports, which are emailed weekly exclusively to patrons and subscribers.


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Posted by Charles Hugh Smith at 9:51 AM

Saturday, January 11, 2020

409Ks, 90% Gains, The Fed and Darth Vader's Warning

The worship of mortals as demi-gods and faith in Golden Idols triggers a turn in the karmic wheel as near-infinite hubris invites divine retribution.
In case you missed it, here's a snapshot of the most recent Federal Reserve board meeting:
It's certainly a peculiar moment in history when the President chides everyone who hasn't gained 90% in their 409K (sic), seemingly unaware that only the top 5% have enough in a 409K to make a difference.
President Trump and the Federal Reserve agree: the "solution" to inequality and malaise is to boost the 409Ks of the top 5%, leaving the rest of the American workforce as glorified servants of the few who benefit from a record-setting stock market.
Note to the Prez and the Fed: goosing the stock market only increases wealth/income inequality. There's only so many dogs owned by the top 5% the peasantry can walk, only so many Priuses and Teslas to wash, only so many preciously over-scheduled children to tutor, only so many $50 steak dinners to bus, only so many bedpans of the top 5%'s parents to empty. The top 5% who benefit from the stock market's relentless melt-up can't generate a tide that raises all ships; all they can do is further enrich themselves on the debt-serfdom of their servants.
As noted in The Fed Can't Reverse the Decline of Financialization and Globalization, the Fed can goose stocks to new highs and the President can cheerlead the rise of inequality, but the Fed can't conjure up wage increases the way it can conjure up $6 trillion to boost Wall Street and the banks: Federal Reserve Admits It Pumped More than $6 Trillion to Wall Street in Recent Six Week Period (via U. Doran).
Then there's the whole triumphal tone of the Fed's self-satisfied service of the super-wealthy and the President's boosterism taunting the bottom 95% who don't own enough stocks in their 409Ks to reverse their deteriorating financial condition. This reflects an openly quasi-religious faith in the omnipotence of the Fed which we can chart:
The worship of mortals as demi-gods and faith in Golden Idols triggers a turn in the karmic wheel as near-infinite hubris invites divine retribution. Call it the loss of the Mandate of Heaven for lack of a better term, but those who taunt the unprivileged, worship false idols and rig the system to benefit the few at the expense of the many are in effect claiming to hold the Ultimate Power in the Universe.
For a suitable warning about the consequences of this unlimited hubris, let's turn to Darth Vader, in paraphrase:
Don't be too proud of this financial terror you've constructed. The ability to control a market is insignificant next to the power of the Force.
Put another way: Those whom the gods would destroy they first make powerful.
(In case you were wondering: the chart is of TSLA, courtesy of www.slopeofhope.com)


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 4:15 PM
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