You Can't Separate Empire, the State, Financialization and Crony Capitalism: It's One Indivisible System

The great irony is what's unsustainable melts into thin air no matter how many people want it to keep going.

Disagreement is part of discourse, and pursuing differing views of the best way forward is the heart of democracy. Disagreement is abundant, democracy is scarce, despite claims to the contrary.

If you think you can surgically extract Empire from the American System, force the State to serve the working/middle classes, end the stripmining of financialization, limit crony capitalism/regulatory capture and get Big Money out of politics--go ahead and do so. I'm not standing in your way--go for it.

But while you pursue your good governance, populist, Left/ Right /Socialist/ Libertarian, etc. reforms, please understand the system is indivisible: the Deep State, the Imperial Project (hegemony and power projection), the State, finance in all its tenacled control mechanisms (greetings, debt-serfs and student-loan-serfs), crony capitalism /regulatory capture, money buying political influence, media propaganda passing as "news", and the evisceration of democracy (something untoward could happen if the serfs could overthrow the Power Elite at the ballot box--can't let that happen)--it's all one system.

Should any one organ be ripped from the body, the entire body dies. The entire system defends each subsystem as integral as a matter of survival. As a result, the naive notion that big money can be excised with only positive consequences is false: restoring democracy places the entire system at risk of implosion.

No more bread and circuses, no more Social Security checks, no more state employee pensions--it all melts into air if any subsystem stops doing its job.

The system is interdependent. Each subsystem needs the others to function. I drew up a chart of the major components (but by no means all) of the system:

The system is a machine in which each gear serves the whole. So go ahead and try to "reform" the system by extracting whatever gear you don't approve of: the Deep State components, the Security State organs, the Federal Reserve, cartels/monopolies enforced by the State, the suppression of democracy, crony capitalism, whatever.

The machine will resist your "reform" to the death because should you succeed, the machine will implode. Take out the financialization gear and the financial system collapses.

So go ahead and reform to your heart's content. Go ahead and believe the system is reformable, if it makes you feel better. Vote for Bernie or The Donald or whomever. Go ahead and disagree with me. Prove me wrong. Prove the State really, really, really wants to serve the working/middle class rather than the Empire that it is. Pursue your Left/ Right/ Socialist/ Libertarian fantasies of righting the Imperial Project by ripping the gears out of the very center of the machine.

It doesn't work that way. We can't remove the gears we find distasteful. Either the machine grinds on and we get our share of the swag--bread and circuses, corporate welfare, State jobs and pensions, Medicaid and Medicare, and all the rest of the immense swag of hegemony and the Imperial Project--or the system implodes and all the swag melts into air.

The great irony is what's unsustainable melts into thin air no matter how many people want it to keep going.

But go ahead and disagree. It's your right, by golly. Go ahead and try to "reform" the system and see how far you get.

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Following in Ancient Rome's Footsteps: Moral Decay, Rising Wealth Inequality

If you want to understand why Rome declined, look no further than the moral decay of ruling Elites.

There are many reasons why Imperial Rome declined, but two primary causes that get relatively little attention are moral decay and soaring wealth inequality. The two are of course intimately connected: once the morals of the ruling Elites degrade, what's mine is mine and what's yours is mine, too.

I've previously covered two other key characteristics of an empire in terminal decline: complacency and intellectual sclerosis, what I have termed a failure of imagination.

Michael Grant described these causes of decline in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.

This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

A lengthier book by Adrian Goldsworthy How Rome Fell: Death of a Superpower addresses the same issues from a slightly different perspective.

Glenn Stehle, commenting on 9/16/15 on a thread in the excellent website peakoilbarrel.com (operated by the estimable Ron Patterson) made a number of excellent points that I am taking the liberty of excerpting: (with thanks to correspondent Paul S.)

The set of values developed by the early Romans called mos maiorum, Peter Turchin explains in War and Peace and War: The Rise and Fall of Empires, was gradually replaced by one of personal greed and pursuit of self-interest.

“Probably the most important value was virtus (virtue), which derived from the word vir (man) and embodied all the qualities of a true man as a member of society,” explains Turchin.

“Virtus included the ability to distinguish between good and evil and to act in ways that promoted good, and especially the common good. Unlike Greeks, Romans did not stress individual prowess, as exhibited by Homeric heroes or Olympic champions. The ideal of hero was one whose courage, wisdom, and self-sacrifice saved his country in time of peril,” Turchin adds.

And as Turchin goes on to explain:

"Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, as mentioned previously, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen….

The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll….

The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen."

Now compare that to the situation in Late Antiquity when

"an average Roman noble of senatorial class had property valued in the neighborhood of 20,000 Roman pounds of gold. There was no “middle class” comparable to the small landholders of the third century B.C.; the huge majority of the population was made up of landless peasants working land that belonged to nobles. These peasants had hardly any property at all, but if we estimate it (very generously) at one tenth of a pound of gold, the wealth differential would be 200,000! Inequality grew both as a result of the rich getting richer (late imperial senators were 100 times wealthier than their Republican predecessors) and those of the middling wealth becoming poor."

Do you see any similarities with the present-day realities depicted in these charts?

And how many congresspeople served in combat in Iraq or Afghanistan? 

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China's Leadership: Brilliant or Clueless?

What worked in the post-global financial meltdown era of 2008-2014 will not work the same magic in the next seven years.

I am often amused by the Western media's readiness to attribute godlike powers of long-term planning and Sun-Tzu-like strategic brilliance to China's leadership. A well-known anecdote illustrates the point.

Zhou Enlai, Premier of China in the Mao era, who when asked by Henry Kissinger about the French Revolution, is reputed to have replied, "It's too early to say."

This is generally taken to express the Chinese Long View, i.e. that the events of 1789 are still playing out.

But accounts of those present discount this interpretation. Zhou understood Kissinger's query as being about the 1968 general strike in France. That social revolution was still actively in play in the early 1970s when Zhou and Kissinger were meeting, so the time frame was definitely present-day, not the 18th century.

China's dramatic rise since the early 1980s, when Deng Xiaoping's reforms occurred, has been nothing short of phenomenal. This remarkable success has to be attributed in some measure to the leadership's policies and decisions of the past three decades.

This economic success is the foundation of those who see China's leadership as brilliant.

But the policies and decisions that worked so well in the boost phase of growth--what we might call the era of low-hanging fruit--do not necessarily work in the next phase, where growth has matured and all the costs that were ignored in the boost phase must now be addressed and paid.

If we look at the problems in China's economy, environment and foreign policy, it seems the leadership is making it up as they go along, with the one overriding goal being to maintain the domestic political control of the Communist Party.

On the economic front, China's leadership has actively pursued policies that expanded the shadow banking system and conventional banking system into a $28 trillion debt bubble. This explosive expansion of credit has fueled a real estate bubble of monumental proportions, and a $10 trillion stock market bubble that is now bursting (as all bubbles eventually do, despite claims that "this time it's different").

Rather than being brilliant, this is a disaster, as bubbles don't dissipate without profound systemic consequences.

rather than deal with the crumbling of the real estate bubble, China's leaders have inflated a stock bubble that promises to bankrupt the tens of millions of households that placed bets in the casino with borrowed money (margin accounts).

On the foreign policy front, China has accomplished the near-impossible, i.e. driving all its neighbors into a united front, as Vietnam, the Philippines, Korea and Japan are all being forced by Chinese belligerence and over-reaching territorial claims to set aside their differences and strengthen ties with the U.S.

Were someone to craft a foreign policy designed to unite all of China's potential enemies into a powerful alliance, this would be the top choice.

The Chinese leadership is acting for all the world as if it moves from strength to strength, when the reality is the opposite: the leadership moves from one catastrophically ill-planned misadventure to the next.

It is easy to predict the unraveling of the real estate and stock market bubbles and the subsequent collapse of China's multi-trillion dollar shadow banking system. Having united all its potential enemies into one camp, China has undone decades of careful diplomacy and boxed itself into a diplomatic corner. Now that it has publicly issued extravagant territorial claims, China cannot back down without losing face; but if it continues to push its claims, it further alienates potential allies and pushes them to strengthen ties with the U.S. and other nations threatened by China's bellicose claims.

In the Great Game, one should never risk one's position before one has the means to defend that position. China is aggressively pursuing territorial claims that is cannot defend without isolating itself--a policy that would doom its export-and-resource dependent economy.

There are few if any historical precedents for China's leaders to follow. the boost phase of plucking low-hanging fruit is the easy part, the fun part, the exciting part.

Dealing with the aftermath of burst credit/asset bubbles, environmental destruction, corruption, wealth inequality, global recession and China's aggressive claim to territory in the South China Sea is the hard part, the not-fun part, the part rife with the potential for catastrophic errors in policy and judgment.

What worked in the post-global financial meltdown era of 2008-2014 (i.e. inflating a $15 trillion credit bubble) will not work the same magic in the next seven years, but there is little evidence that China's leadership (or indeed, the leadership of the U.S. Japan and the European Union) have a Plan B that will replace strategies that are yielding diminishing returns and raising the risks of a systemic failure.

Brilliant or clueless? As Zhou observed, it's too early to tell.

This essay is drawn from Musings Report 27. The Musings Reports are emailed weekly to subscribers ($5/month) and major contributors ($50+/annually).

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The Echo Bubble in Housing Is About to Pop

And here's the knife in the heart of the Echo Housing bubble: declining household income.

The Federal Reserve-induced Echo Housing Bubble is finally starting to roll over, and the bubble's pop won't be pretty. Why is the bubble finally popping now?

All the factors that inflated the Echo Housing bubble are running dry. These include:

-- unprecedented low mortgage rates

-- FHA mortgage approvals for anyone who fogs a mirror

-- frantic cash buying by Chinese millionaires desperate to get their money out of China

-- the Federal Reserve buying up trillions of dollars in mortgages

-- lemming-like buying of housing for rentals by everyone from Mom and Pop to huge hedge funds.

The well's gone dry, folks. There isn't going to be another push higher or a third housing bubble after this one pops.

Let's start with the basics: demographic demand for housing and the price of housing. There are plenty of young people who'd like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today's nosebleed level--a level just slightly less insane than the prices at the top of Bubble #1.

Charts courtesy of Market Daily Briefing)

It's considered bad form to describe today's prices as insane. It tends to hurt the feelings of everyone who's counting on the Echo Bubble to 1) make them even richer or 2) bail them out of the hole they fell into after Housing Bubble #1 popped.

Exhibit B is the insanely low mortgage rate, which has finally reversed course and is notching higher after 30 years of going lower. Why are today's rates insane? Risk. Mortgages are intrinsically risky. People with high credit scores lose their jobs, experience horrendous medical crises, get divorced, etc., and the net result is a default that is unexpected.

Then there's all the credit-rating-of-501 crowd that was always one missed paycheck away from defaulting on their FHA/VA mortgage. Once the layoffs begin scything through Corporate America and struggling small businesses, those living paycheck to paycheck buyers of Echo Bubble housing will have no choice but to jingle mail the keys to the bank.

Though they may still be drooling from the smack-like high of get-rich-quick fantasies, anyone buying rental housing at these prices is on the cusp of discovering a very painful reality: few can make money buying rental property at these prices, not once rents plummet as the global recession comes home to roost.

If we look at the ratio of mortgage debt to household income, the current level is still double the pre-financialization level. A slight decline from the insane levels of the bubble mania do not qualify as sane.

The Fed goosed the Echo Bubble by buying up an insane $1.75 trillion in mortgages, almost 20% of the entire mortgage market in the U.S. The Fed has kept buying mortgages to maintain this level, but the Fed is no longer expanding their mortgage holdings. That well has run dry.

And here's the knife in the heart of the Echo Housing bubble: household income-- stagnating for decades for 90% of households--has declined since the Bubble Top when adjusted for inflation. Please explain how declining real income can support nosebleed home prices now that mortgage rates have bottomed and started their inevitable rise from absurdly low levels.

If you want to believe the Echo Bubble can continue inflating, by all means take another hit of happy-housing-talk smack. But let me warn you--the high wears off.

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Three Strategies to Make Your Life Easier as Times Get Harder

No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged.

Times are going to get harder going forward, for all the reasons that are already visible in today's headlines. So what can we do to make our own lives easier as times get tougher? Here are three suggested strategies:

1. Don't get enmeshed with dysfunctional people, families or businesses. When we're young, we're adept at making excuses for people in dysfunctional families and enterprises. We expect them to work their way out of their dysfunctions. We think we can help in this process.

Alas, we can't. People usually can't rid themselves of dysfunction without an extraordinary effort. Getting enmeshed with a dysfunctional person/family/business can only drag you down. The only way to avoid the mess is to avoid the dysfunctional person/family/business in the first place. Wish them well and get out.

2. Be fanatical about reducing fixed costs. This sounds so obvious, but it's really the key to surviving hard times and building productive wealth, i.e. the kind that yields income, rain or shine.

Remarkably, people may acknowledge this in an abstract fashion but few actually live by it. The vast majority let their fixed costs rise with their income. Businesses move to pricier digs once they start feeling flush, and people move up to costlier vehicles, homes, clothing, vacations, etc.

The ideal business has been stripped of fixed costs. For example: rent on home office: zero. Labor overhead: zero, if you hire only other free-lancers-contractors.

Management guru Peter Drucker made the point about reducing fixed costs another way. He famously noted that "businesses don't have profits, all they have is costs." (a paraphrase)

In other words, there's no guarantee of additional revenues/sales or profits; all we know for sure is our fixed costs, i.e. what we have to pay monthly even if our revenues are zero.

Some fixed costs rise despite our fanatic focus. Healthcare costs rise until we qualify for Medicare. That's a given. Our only way to reduce healthcare costs is be fanatical about being healthy.

Servicing debt is a fixed cost. You have to service the debt whether you're making money or not. So eliminating debt is one critical way to reduce fixed costs.

Frugality is exceedingly useful, but frugality is not quite the same as being fanatical about reducing fixed costs. Understanding the difference is an important part of this strategy.

3. Learn how to calculate and manage risk. Risk is the ultimate yin/yang. If you don't take any risks, you're limited to a salary: the employer takes the risk and rewards, you get the salary and no upside.

But if you take a risk, you can lose the gamble: the investment, the job, the house, the enterprise.

You want to score a ten-bagger (ten-fold increase) in the stock market? Well, belly up to the roulette wheel, because most of the bets that pay off that big are extraordinarily risky.

There is no way to eliminate risk. Life is risk. Doing great things requires taking risks. The "safe way" offloads risk and reward to others. You want the big reward, you have to take the big risk.

When the tide is raising all boats, it's remarkably easy to rank yourself as a genius who manages risk effortlessly. Rising tides are not a good test. Its the ebb tide, when every investment is crashing in value, that tests risk management.

It boils dowm to this: understand the risks you're taking (especially when your mutual fund manager assures you everything in your fund is low-risk) and set limits on the risks you're taking on.

No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged (and hedges have limits, too). Anything else is illusion. This will become evident to all within the next decade as all the "sure things" melt into thin air.

This essay is excerpted from Musings Report 37. The Musings Reports are emailed weekly to subscribers ($5/month) and major contributors ($50+/annually).

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Global Markets: It's Getting Ugly Out There

We also discussed the most critical systemic sources of risk in global markets.

You'd have to be in full denial mode not to see that it's getting ugly out there in global markets: currencies are melting down, trade and shipping are tanking, commodities are swooning and global stock markets are increasingly on central-bank life support.

Gordon Long and I recently discussed just how ugly it might get in a 28-minute video program.

One focus was Gordon's forecast that the market may yet recover from its current downtrend and trace out a M Top: one more buy the dip rally that would then be followed by a bone-crushing downtrend as the wheels completely fall off the global "growth" story.

We also discussed a few of the most critical systemic sources of risk in global markets:

1. There's too much debt globally; public and private debt has skyrocketed since 2008.

2. Mal-investment due to perverse incentives: corporations borrow money for stock buybacks rather than to invest in new productive capacity

3. Stagnant income/revenues: households, companies and nations cannot support more debt

4. The rise of high-frequency trading (HFT) has increased the odds of flash crashes and instability

5. The rising U.S. dollar has triggered capital flight from emerging markets and China

6. China’s economy is grinding to a halt, crushing demand for commodities and commodity-dependent economies

7. Opaque banking: shadow banking in China, dark pools in offshore banking centers, etc. True totals of debt, leverage and the quality of collateral are all unknown

8. Deteriorating collateral globally. How many of the 60 million empty “investment” flats in China can be sold in an illiquid marketplace with little demand for existing housing? What's the real value of assets listed on U.S. balance sheets that are marked to fantasy?

We cover a lot of ground in this program.

It's Getting Ugly Out There (28:20 video, with Gordon T. Long)

view it on YouTube

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Time to Trade in Your Jag, Benz, BMW for a Dented Econobox: Days of Rage Are Coming

The resistance will take the form of subverting the signifiers of wealth that exemplify the few who have benefited so greatly while everyone else lost ground.

It's time to trade in your Jag, Mercedes, BMW (and maybe your Prius, Volvo, Lexus, etc.) before the Days of Rage start. As I've explained before ( As the "Prosperity" Tide Recedes, the Ugly Reality of Wealth Inequality Is Exposed), the rage of the masses who have been losing ground while the Financier Oligarchs, the New Nobility and the technocrat class reap immense gains for decades has been suppressed by the dream that they too could join the Upper Caste.

But once the realistic odds of that happening (low) sink in, the Days of Rage will begin. For those still who don't know the facts of rising inequality, here's what you need to know.

The top 1% skim 23% of all income:

While the top 5% has enjoyed substantial income gains over the past 45 years, adjusted for inflation, the bottom 90% have lost ground:

The last time there was mass unrest in America was the civil rights/Vietnam War era. The power of the civil rights movement arose from the core injustice of segregation (separate and unequal) and institutionalized racism/bias. This institutionalized injustice drew people from all classes and ethnicities into the streets, where they were promptly beaten by police.

The anti-war's Days of Rage drew from a different well of unrest. In effect, the college-age offspring of the great American middle class had decided that sacrificing their lives for the Domino Theory/defense of previous incalculably stupid Imperial decisions made no sense.

But when they made their doubts known, the Powers That Be's response shocked them: we don't care what you think, you're going to fight our war, no questions asked. The middle class is more than an income bracket; it's a mindset of entitlements, one of which is that the middle class's opinions matter.

Surprise, middle class America--the Power Elites could care less what you think. If the Empire needs your sons for an insane war, deliver them to Caesar, and we'll ship them home in body bags, or alive but hooked on smack, whatever--the individual consequences don't count.

Seeing middle class kids destined for successful careers in the Establishment being beaten, shot down and arrested as if they were rabble laid the Imperial Project bare and disabused people of their naive faith that the Power Elites cared what they thought.

We are approaching another moment in history that disabuses what's left of the middle class of their fantasy that they matter. The poor don't harbor such entitlements; they know all the high-minded promises are shuck and jive. They have fewer illusions to crush.

The heavily-militarized police and the central bureaucracies of repression would love to confront an unarmed mob of middle class kids. It would be child's play to teargas them, beat them, and trundle them off in mass arrests.

But this time around, people have gotten wise to the militarized brutality. The Occupy Wall Street movement taught us all a powerful lesson: if you assemble 500 people in a symbolically important place like Wall Street, the Power Elites will assemble 1,000 cops/F.B.I. agents et al. to crush you.

So the resistance will take the form of subverting the signifiers of wealth (when nobody's looking) that exemplify the few who have benefited so greatly while everyone else lost ground. For example:

If you want to retain your signifier of wealth/success, you'd be better off turning it into an art car:

Alternatively, you can cover it with adverts (Eat at Joe's). People will assume it's a company car and you're just the schmoe hired to drive it.

But by far the safest strategy is to dump the Jag, Benz, etc. and acquire a well-worn econobox vehicle with some rust spots and dents, a car that won't attract any notice in a sea of other old vehicles driven by people clinging to the dignity of personal transport.

If you really want a new car, then buy a working-class hero car, i.e. a new American Muscle car: a Mustang, a Camero, a Challenger. But for goodness sakes, don't dress like a tech-bro or a financier.

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