The Hidden-in-Plain-Sight Mechanism of the Super-Wealthy: Money-Laundering 2.0

Financial and political power are two sides of one coin.

We all know the rich are getting richer, and the super-rich are getting super-richer. This reality is illustrated in the chart of income gains, the vast majority of which have flowed to the top .01%--not the top 1%, or the top .1% -- to the very tippy top of the wealth-power pyramid:

Though all sorts of reasons have been offered to explain this trend--I've described the mechanisms of financialization here for years--two that don't attract much mainstream media attention are money laundering and control fraud, i.e. changing the rules of what's legal so what was illegal yesterday is legal today--presto-magico, illegally skimmed wealth is now "legal."

Correspondent JD recently submitted an excellent summary of the progression from Money Laundering 1.0 to Money Laundering 2.0:

Money laundering 1.0 is making dirty money legal, control fraud is manipulating the 'legal' options, and money laundering 2.0 is making sure that 'legal' fortunes are not taxed and cannot be clawed back."

Conventional money laundering works by shifting ill-gotten gains into legitimate banks and/or assets. Ill-gotten gains can be laundered quite easily by buying homes or businesses (in the U.S., Europe, etc.) with cash. The home or enterprises can then be sold and the net is now legit.

Another kind of money laundering opens shell accounts in U.S. states with no income tax or offshore tax havens and then transfers intellectual property or other income-producing assets into the shell accounts.

As JD pointed out in his email to me, control fraud is a profoundly insightful concept presented by author William K. Black (Wikipedia), the essence of which is that those with control/ power in centralized institutions can defraud the institutions and their users/citizenry by modifying the rules of what's legal/allowable, and do so legally, i.e. within the letter of the law if not the intent of the law.

Black is the author of the book The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.

Control fraud ranges from juicing the financials of companies to "legally" stripmining entire nations. In my view, borrowing billions of dollars to buy back shares in a company and thereby boosting the value of the stock options held by top management is an excellent example of fully legal control fraud: the top managers essentially transfer enormous wealth from the enterprise to their private pockets, under the guise of "building shareholder value."

In other words, control fraud ranges from masking fraud to bringing fraud (however shakily) into the circle of quasi-compliance to fully legal fraud (i.e. much of what enriched the few at the expense of the many in 2002-2008 housing/mortgage bubble.)

The ultimate form of control fraud is our auction-to-the-highest-bidder "democracy" in which wealth casts the only votes that count. Just transfer enough wealth to the political class via campiagn contributions, "donations" to their foundations, etc., and then have a juicy targeted tax break inserted into a complex legislative bill.

The structure of JD's money laundering 2.0 has been exposed by The Panama Papers and the Paradise Papers. If you're not familar with the enormous offshore tax avoidance industry, here are a few sources to start with:

Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption(a.k.a. The Panama Papers)

The Paradise Papers: A new mass data leak, this time from an elite law firm with elite clients, shows how deeply offshoring is embedded in the global financial system.

How Corporations and the Wealthy Avoid Taxes (NYT)
An estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultrawealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities

Wealth doesn't trickle down – it just floods offshore, research reveals (The Guardian)

Why we are shining a light on the world of tax havens again (The Guardian)
After explosive leaks from an offshore firm last year, others in the sector insisted it was a bad apple. Now that claim can be tested.

How to stop the super-rich looting our wealth: make it illegal (The Guardian)
The Paradise Papers expose a business model that lets the few asset-strip the many. Governments have powerful tools to stop this – but do they have the will?

Of course they don't, because the political class is a direct beneficiary of Money laundering 2.0: the primary coin of trade between the super-wealthy/corporatocracy and the political class is is the granting of what amounts to control fraud: tax breaks and loopholes that are tailored specifically to the super-wealthy and global corporations.

The Hidden Wealth of Nations: The Scourge of Tax Havens (book)

Just remember two things: JD's definition of money laundering 2.0: "making sure that 'legal' fortunes are not taxed and cannot be clawed back"

there is only one elite class at the top of the wealth-power pyramid: Financial and political power are two sides of one coin.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).

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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Is One Reason Why the Status Quo Disdains Bitcoin Is the "Wrong People Are Getting Rich"?

The wrong people--rebels, outsiders, nerds and techies-- got on the cryptocurrency boat while their insider/rentier "betters" blew it and are now raging bitterly onshore.

The psychology of money, wealth and speculative manias is endlessly fascinating. Most of what's written on these subjects focus on the process of building wealth as if it were a quasi-science rather than a psychologically driven process. Only speculative manias attract a psychology-based analysis, usually characterized as some variant of the madness of the herd running off the cliff en masse.

But money and wealth are nothing but more sedate reflections of the same dynamics that drive speculative manias. Much has been written about cognitive biases and thinking fast and slow, but these explorations do not exhaust the psychology underpinning money, wealth and speculative manias.

Few things have unleashed the Monster Id of wealth and money quite like bitcoin and the cryptocurrencies. Compare the speculative manias of the dot-com era (1995 - 2000) and the housing bubble (2002 - 2007) with the crypto-mania: in the first two manias, the status quo embraced the mania as rational and justified: the Internet would continue growing for decades, housing never goes down, etc.

But the status quo has not embraced cryptocurrencies with the same ardor--why? Instead of endless justifications for valuations, the status quo is filled with reports that 97% of all economists view bitcoin as a bubble, and endless articles decrying the bitcoin bubble as a fools game that will deservedly burst, and soon.

Why did the status quo embrace irrationally exuberant bubbles in the 1990s and 2000s, but views the exuberance of cryptocurrencies with disdain? I think this is a fruitful topic to explore, largely because nobody seems to be asking this question.

Here are my suppositions:

1. The status quo reviles cryptocurrencies because the wrong people are getting rich.

2. The status quo reviles cryptocurrencies because the usual insiders (Wall Street and its politico leeches) didn't get on board early, and they're deeply offended that they missed the boat.

3. Until the advent of bitcoin futures trading, the usual insiders had no means to skim profits from the exuberance.

To me, these dynamics go a long way in explaining the 97% of the status quo's visible loathing of bitcoin and the cryptocurrencies.

In other words: why embrace some manias but not all manias? Answer: some manias make the usual insiders filthy rich, others don't. The dot-com mania generated billions of dollars in profits for Wall Street and the rest of the financier-politico leeches (i.e. the rentier class) via IPOs (initial public offerings), insider deals and vast fees generated by trading the mania with other peoples' money.

The housing bubble generated billions of dollars in profits for Wall Street via the issuance of mortgage-backed securities (MBS), CDOs and other exotic financial instruments based on mortgages and related securities, and realtors (and the rest of the housing industry) banked billions in commissions, fees and other skims.

In both cases, Average Joe and Jane reckoned the manias were their ticket to untold wealth. A relative few Average Joes and Janes did strike it rich, usually by being early employees of companies that went public, and a few others managed the impossible, i.e. buying low and selling high and then exiting the casino with their winnings.

But the vast majority of the Average Joes and Janes were fodder for the chipping machines of Wall Street and the FIRE (finance, insurance, real estate) insiders and elites. Far more people lost money in the period between 1997 and 2003 than won big and kept their winnings. Millions of people gambled on the housing bubble expanding forever and lost everything.

Now compare that to the cryptocurrency mania: Wall Street and the rest of the financier-politico leeches (the rentier class) have virtually no insider skims in the cryptocurrencies--is it any wonder they hate bitcoin with a passion that correlates to their inability to rake in billions of low-risk fees from the mania?

The psychology of FOMO (fear of missing out) is well known; the indignation of those who didn't get on board before the ship sailed is less well noted. The financier/rentier class has a very high opinion of its own moxie and intelligence, and the fact that they missed the boat entirely on bitcoin et al. is like a knife of wounded pride plunged directly into their greedy hearts.

Those who can see past their own wounded pride are busy investing in blockchain applications and cryptocurrency funds, while those who cannot let go of their wounded pride are raging daily against the bitcoin bubble, and praying nightly to their evil gods for its collapse, to prove themselves right after all.

Every day that bitcoin doesn't crash to zero is a day of pain for those whose pride was wounded by missing the cryptocurrency boat.

Even worse--if that's possible for those whose greed is insatiable--the wrong people have gotten rich--techies, nerds, outsiders, rebels, etc.

It's as if the crypto-rabble rebels just blew up the Financial Empire's Death Star and got away with it.

Interestingly, few balk when privileged insiders mint fortunes for doing essentially nothing but exploiting their privileges. The corporate media heaps fatuous praise on insiders who reap billions of dollars from others' labor and ideas via IPOs, leveraged buyouts, etc. because of course these rentiers are our bosses and overlords.

It's dangerous for a mere peasant in the Corporate-State Feudal System (i.e. the status quo) to speak truth to power against the Financial Aristocracy that issues the paychecks.

You can bet that if a Wall Street insider had bought bitcoin in size for $100 each, said insider would be justifying today's valuations and arguing for higher valuations ahead, just as he/she did in the dot-com and housing manias.

So it all boils down to this: the wrong people--rebels, outsiders, nerds and techies-- got on the cryptocurrency boat while their insider/rentier "betters" blew it and are now raging bitterly onshore, not just resentful but indignant that this mania didn't enrich insiders like it should have.

So sorry about your Death Star. I guess this doesn't bode well for your bonus and promotion in the Imperial hierarchy.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).

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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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, Lee V.D.B. ($25), for your supremely generous contribution to this site-- I am greatly honored by your long-standing support and readership.

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"Wealth Effect" = Widening Wealth Inequality

Note that widening wealth and income inequality is a non-partisan trend.

One of the core goals of the Federal Reserve's monetary policies of the past 9 years is to generate the "wealth effect": by pushing the valuations of stocks and bonds higher, American households will feel wealthier, and hence be more willing to borrow and spend, even if they didn't actually reap any gains by selling stocks and bonds that gained value.

In other words, the mere perception of rising wealth is supposed to trigger a wave of renewed borrowing and spending.

This perception management only worked on the few households which owned enough of these assets to feel wealthier--the top 5%, the top 6 million out of 120 million households. This chart shows what happened as the Fed ceaselessly goosed financial assets higher over the past 9 years: the gains, real and perceived, only flowed to the top 5% of households earning in excess of $200,000 annually.

Spending by the bottom 95% has at best returned to the levels reached a decade ago in 2007.

By focusing on boosting financial assets to the moon as a means of goosing spending, the Federal Reserve has widened wealth and income inequality to the breaking point. Perception management doesn't actually boost the inflation-adjusted wages of the bottom 95%, which have stagnated for decades. Nor does boosting assets do much good for the vast majority of households which have modest holdings of stocks and bonds, usually in IRA or 401K retirement accounts they can't touch without paying steep penalties.

As the charts below illustrate, the Grand Canyon between the top 5% and everyone else is widening. Let's say a househould has $12,000 in retirement funds and $5,000 in a savings account. (Many households have less than $1,000 in savings, so this example-household is doing pretty well to have $17,000 in cash and financial assets.)

Thanks to the Federal Reserve's Zero Interest Rate Policy (ZIRP), savers have lost ground after adjustments for inflation. The stock market has more than doubled, and most bond funds have appreciated, but precious metals and other commodities have not performed as well. So let's say the household's retirement portfolio rose by a hefty 75%, or $9,000, to a total of $21,000.

Does this modest gain actually change the financial foundation of the household to the point that the household can now afford to buy a new vehicle, college tuition, etc.? The short answer is no; the gains are simply too modest as a percentage of income to make any difference.

Compare this to a top 5% household with hundreds of thousands of dollars of financial assets: gains registered in the hundreds of thousands do indeed move the needle on household wealth and perception management. The top 5% haven't just reaped outsized gains in Fed-goosed assets; they've also reaped the vast majority of any wage gains generated in the past 9 years of "recovery."

As this chart shows, the bottom 90% lost ground, and the really substantial gains have accrued only to the top 1%.

Note that widening wealth and income inequality is a non-partisan trend. The political and financial elites have feathered their own nests while the bottom 95% have lost ground.

The Federal Reserve's perverse policy of perception management has exacerbated wealth and income inequality: "wealth effect" = widening wealth inequality.


I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).

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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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, Mike T. ($50), for your supremely generous contribution to this site-- I am greatly honored by your support and readership.

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Christmas 2017: Why I'm Hopeful

A more human world lies just beyond the edge of the Status Quo.

Readers often ask me to post something hopeful, and I understand why: doom-and-gloom gets tiresome. Human beings need hope just as they need oxygen, and the destruction of the Status Quo via over-reach and internal contradictions doesn't leave much to be happy about.

The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with horrific incentives for predation, exploitation, fraud and complicity and few disincentives.

A more human world lies just beyond the edge of the Status Quo.

I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress.

But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow.

The remarkable success of humanity as a species is not simply the result of a big brain, opposable thumbs, year-round sex, innovation or even language; it is also the result of social and cultural associations that act as a "network" for storing knowledge and good will--what we call technical and social capital.

I have devoted significant portions of my books--

Survival+

An Unconventional Guide to Investing in Troubled Times

Resistance, Revolution, Liberation

Why Our Status Quo Failed and Is Beyond Reform

A Radically Beneficial World: Automation, Technology & Creating Jobs for All

Money and Work Unchained

to an explanation of how community and self-reliance have atrophied under the relentless expansion of the dominant Savior State.

The social capital and "return on investment" earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State--a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment--the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent--individual and corporation alike--soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for "help" quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State's resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State's goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of "growth" and "prosperity" is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s -- transport, food, shelter and utilities. The "growth" since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one's identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for "growth" (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil--both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy is why I am hopeful.

I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).

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.

---

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, Ruben B. ($5/month), for your superbly generous pledge to this site-- I am greatly honored by your support and readership.

Read more...