Friday, August 31, 2018

Once the Bubbles Pop, We're Broke

I hate to break it to you, but the everything bubble isn't permanent.
OK, I get it--the Bull Market in stocks is permanent. Bulls will be chortling in 2030 that skeptics have been wrong for 22 years--an entire generation. Bonds will also be higher, thanks to negative interest rates, and housing will still be climbing higher, too. Household net worth will be measured in the gazillions.
Here's the Fed's measure of current household net worth: a cool $100 trillion, about 750% of disposable personal income (DPI):
Household net worth has soared $30 trillion in the past decade of permanent monetary and fiscal stimulus. No wonder everyone is saying Universal Basic Income (UBI)-- $1,000 a month for every adult, no questions asked--is affordable, along with Medicare For All (never mind that Medicare is far more expensive than the healthcare provided by other advanced nations due to rampant profiteering, fraud and paperwork costs--we can afford it!)
And we get to keep the Endless Wars (tm), trillion-dollar white elephant F-35 program, and all the other goodies--we can afford it all because we're rich!
We're only rich until the bubbles pop, which they will. All speculative bubbles deflate, even those that are presumed permanent, And when the current everything bubble pops, net worth--and all the taxes generated by bubble-era capital gains--vanish.
Take a look at the Federal Reserve's Household Balance Sheet (June 2018):
$34.6 trillion in non-financial assets
$81.7 trillion in financial assets
$15.6 trillion in total liabilities ($10 trillion of which is home mortgages)
$100 trillion in net worth
So $25 trillion is in real estate. When the housing bubble pops, $10 trillion will go poof. Maybe $12 trillion, but why quibble about a lousy $2 trillion? We're rich!
Consumer durables are worth $5.7 trillion, minus consumer debt of $3.8 trillion. As we know from the 2008-09 recession, the value of used boats, BBQ grills and assorted other gew-gaws drops to near zero (boats abandoned to avoid slip fees, etc.), so shave off the phantom $2 trillion in consumer durables.
Stocks held directly and indirectly, $28 trillion. Stocks are overvalued by half, so once reality sets in $14 trillion will vanish into thin air.
Non-corporate businesses currently worth $11.9 trillion--in the depths of a recession, many will close and the market value of the struggling survivors won't be much. Let's say $5 trillion vanishes.
That's $30 trillion up in smoke, and we haven't even gotten to pensions and $15 trillion in "other financial assets." Whatever they are, we can bet that $10 trillion in pension entitlements and "other financial assets" disappear, too.
So a reasonable estimate is post-bubble, household net worth drops by 40%, or $40 trillion. This is actually being generous, as this leaves a $20 trillion gain since 2000, a period in which GDP rose from $10.2 trillion to $19.5 trillion:
I hate to break it to you, but the everything bubble isn't permanent. Extend this geometric line of net worth a decade and then extend the GDP line a decade; at that point, our wonderful assets will be worth $1,000 trillion while our real-world economy will have grown to $25 trillion. Does history suggest this is possible, or likely? Will the pundits still be declaring that this is all quite reasonable considering how well the economy is doing?
We're only rich until the bubble pops--then we're broke.
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Thursday, August 30, 2018

Why Is Productivity Dead in the Water?

The only possible output of this system is extortion as a way of life.
As the accompanying chart shows, productivity in the U.S. has been declining since the early 2000s. This trend mystifies economists, as the tremendous investments in software, robotics, networks and mobile computing would be expected to boost productivity, as these tools enable every individual who knows how to use them to produce more value.
One theory holds that the workforce has not yet learned how to use these tools, an idea that arose in the 1980s to explain the decline in productivity even as personal computers, desktop publishing, etc. entered the mainstream.
A related explanation holds that institutions and corporations are not deploying the new technologies very effectively for a variety of reasons: the cost of integrating legacy systems, insufficient training of their workforce, and hasty, ill-planned investments in mobile platforms that don't actually yield higher productivity.
Productivity matters because producing more value with every unit of energy, every tool and every hour of labor is the foundation of higher wages, profits, taxes and general prosperity.
I have four theories about the secular decline in productivity, and all are difficult to model and back up with data, as they are inherently ambiguous and hard to quantify.
1. Mobile telephony and social media distract workers so significantly and ubiquitously that the work being produced has declined per worker/per hour of paid labor.
2. Public and private institutions have become grossly inefficient and ineffective, soaking up any gains in productivity via their wasteful processes and institutionalized incompetence.
3. Our institutions have substituted signaling and compliance for productivity.
4. The financial elites at the top of our neofeudal economy have optimized protecting their skims and scams above all else; their focus is rigging the system in their favor and so productivity is of no concern to them.
Other commentators have noted the drain on productivity as workers constantly check their mobile phones and social media accounts--up to 400 times a day is average for many people.
"Addicted" is a loaded word, so let's simply note the enormous "able-to-focus-without-interruptions" gap between those who only answer phone calls and limit social media to a few minutes per day in the evening during off-work time, and those who are distracted hundreds of times throughout the day.
Some tasks can be interrupted without much loss of productivity, but most knowledge-worker type tasks are decimated by this sort of constant distraction--even though the distracted worker will naturally claim that their productivity is unharmed.
The list of public institutions that now demand absurd wait times for minimal or even defective service keeps growing. The California Dept. of Motor Vehicles (DMV) now soaks up to eight hours of waiting to complete mundane tasks. Employees have been caught napping for hours, and customers waiting for service note the lines finally start moving in the last half-hour of the day when the employees are motivated to process the people in line so they can go home.
The other public-sector systems are equally Kafkaesque; building permits that once took hours to process now take months, and so on. In the private sector, it's becoming increasingly difficult to fix problems created by the corporations themselves: multiple phone calls, long wait times, etc.
The core dynamic is that public institutions and corporate cartels lack any mechanisms to enforce transparency and accountability; there is no competitive pressure on the DMV or courts, and essentially zero competitive pressure on monopolies such as Facebook and Google and cartels such as the big healthcare insurers.
The only possible output of this system is extortion as a way of life: we make you wait, we make you pay more for a poor quality service, we make you comply with useless regulations, we make you use buggy, bloated software, and so on.
Quasi-monopolies like Microsoft and Apple force tens of millions of users to re-learn new versions of software, detracting from productivity rather than enhancing it, despite their claims. Other types of planned obsolescence are equally destructive.
With no mechanisms in place to enforce accountability and efficiency, there is no accountability or efficiency. And so these monopolies and cartels can be as wasteful, inefficient and unaccountable as they want.
Compliance is a productivity killer. Doctors and nurses no longer have enough time to serve patients because compliance now soaks up so much of their time.
Signaling, like compliance, is a productivity killer. The entire trillion-dollar system of higher education doesn't measure or reward learning or the acquisition of knowledge; the diploma / credential signals that the student dutifully navigated the bureaucracy and thus is signaling their readiness to be a corporate/government drone in another bureaucracy. That they learned next to nothing is of no concern to the system. (If learning was the goal, we'd accredit the student, not the institution.)
If we look at the economy as a whole, we find it is dominated by monopolies and cartels, public and private. No wonder overall productivity is declining: there are no feedback loops or mechanisms to enforce transparency, accountability or pressures to improve efficiency and productivity gains on these neofeudal, extortionist structures.
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Tuesday, August 28, 2018

Here's How We Ended Up with Predatory, Parasitic Elites

Combine financialization, neoliberalism and moral bankruptcy, and you end up with predatory, parasitic elites.
How did our financial and political elites become predatory parasites? Some will answer that elites have always been predatory parasites; as tempting as it may be to offer a blanket denunciation of elites, this overlooks the eras in which elites rose to meet existential crises.
As historian Peter Turchin explained in his book War and Peace and War: The Rise and Fall of Empires, the value of sacrifice was a core characteristic of the early Republic's elite:
"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 Rome 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?
Correspondent Jim B. summarized historian Arnold Toynbee's study of the rise and fall of civilizations: "Civilizations fail when their elites change from an admired dynamic creative class to a despised Establishment of corrupt rentiers, an entrenched governing class unfit to govern."
I would trace the slide into self-serving parasites to three dynamics: financialization, neoliberalism and moral bankruptcy. While definitions of financialization vary, mine is:
Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.
Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.
Neoliberalism is the belief that the social order is defined and created by markets: if markets are free, participants, society and the political order are also free.
This conceptual framework is the perfect enabler for the dominance of credit-based, leveraged capital, i.e. Neofeudalism. In a "free market," those with access to nearly-free money can outbid everyone who must rely on savings from earned income to finance borrowing. In a "free market" where those with access to leverage and unlimited credit are more equal than everyone else, the ability of wage earners to acquire rentier assets such as rental housing, farmland and timberland is intrinsically limited by the financial system that makes credit and leverage scarce for the many and abundant for the few.
The moral bankruptcy of our financial and political elites is self-evident.Combine financialization, neoliberalism and moral bankruptcy, and you end up with predatory, parasitic elites.
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Sunday, August 26, 2018

To Understand America's Neofeudal Economy, Start with Extortion

Here is the result of America's neofeudalism: soaring wealth and income inequality.
Let's spin the time machine back to the late Middle Ages, at the height of feudalism, and imagine we're trying to get a boatload of goods to the nearest city to sell. As we drift down the river, we're constantly being stopped and charged a fee for transiting one small fiefdom after another. When we finally reach the city, there's an entry fee for bringing our goods to market.
Note that none of these fees were payments for improvements to transport or for services rendered; they were simply extortion. This was the economic structure of feudalism: petty fiefdoms levied extortionate fees that funded the lifestyles of nobility.
This is why I have long called America's economy neofeudal: we pay ever higher fees for services that are degrading, not improving. This is the essence of extortion: we don't get any improvement in goods and services for the extra money we're forced to pay.
Consider higher education: costs are soaring while the value of the "product"--a college diploma--declines. What extra value are students receiving for the doubling of tuition and fees? The short answer is "none." College diplomas are in over-supply, and studies have found that a majority of students learn remarkably little of value in college.
As I explain in my book The Nearly Free University and the Emerging Economy, the solution is to accredit the student, not the institution. If the student learned very little, he/she doesn't get credentialed.
Were students to have access to the best classroom lectures online (nearly free), and on-the-job apprenticeships in the workplace, (nearly free or perhaps even paid), learning would be significantly improved and costs reduced by 80% to 90%.
In this structure, there's no need for costly campuses or administration; the entire structure of higher education could be largely automated with software, except for the workplace apprenticeships which focus on case studies and real-world projects that are creating value in the here and now.
Consider healthcare: has the quality of healthcare doubled along with costs?Are Americans significantly healthier as the costs of healthcare have tripled? The aggregate health of Americans has arguably declined, while the stresses placed on frontline care providers by the ever-heavier burdens of compliance and paperwork have increased.
What about the $200 hammers and $300 million F-35 aircraft of the defense industry? Once again, as costs have soared, the quality and effectiveness of the products being supplied has arguable declined.
How about state and local government services? Are they improving as taxes and junk fees rise? Once again, government services are often declining in quality as taxes and fees increase by leaps and bounds.
In sector after sector, the quality of the goods and services has declined while costs have soared. This is the acme of neofeudalism: insiders and the New Nobility are skimming fortunes as prices skyrocket and the quality of the goods and services provided plummet.
Look at the cost increases in higher education, healthcare and childcare and ask yourself if the quality of those services have risen in lockstep with price increases.
This is nothing but neofeudal extortion. The cartels raise prices and we're forced to pay them, just as feudal commoners were forced to pay.
Here is the result of America's neofeudalism: soaring wealth and income inequality. Insiders and the New Nobility are getting richer while debt-serfs are getting poorer.
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Thursday, August 23, 2018

How "Wealthy" Would We Be If We Stopped Borrowing Trillions Every Year?

These charts reflect a linear system that is wobbling into the first stages of non-linear destabilization.
The widespread presumption is the U.S. is wealthy beyond words, and will remain so as far as the eye can see: wealthy enough to fund trillion-dollar weapons systems, trillion-dollar endless wars, multi-trillion dollar Medicare for all, multi-trillion dollar Universal Basic Income, and so on, in an endless profusion of endless trillions.
Just as a thought experiment, let's ask: how "wealthy" would we be if we stopped borrowing trillions of dollars every year? Or put another way, how "wealthy" would we be if the rest of the world stops buying our trillions in newly issued bonds, mortgages, auto loans, etc.?
The verboten reality is our "wealth" is nothing but a sand castle of debt. Take away more borrowing and the castle melts away. I've gathered a selection of charts that show just how dependent we are on massive debt expansion that continues essentially forever, as any pause in debt expansion will collapse the entire system.
Corporate buybacks have powered rising corporate earnings--and the buybacks are funded by debt. Corporate debt has exploded higher in the past decade, enabling stock buybacks on an unprecedented scale.
Government debt--federal, state and local-- is rising an exponential rates.We're not paying for more government programs with earnings--we're simply borrowing trillions and hoping we can borrow the interest payments that will also rise along with the debt.
Household debt, student loans, auto loans--all are soaring. The corporate sector, government and the household sector--all are living on borrowed money, and relying on magical thinking to mask the inevitable consequences.
Here's debt to GDP. Yes, the economy expanded, but debt expanded much faster. Every additional dollar of GDP now requires multiple dollars of new debt.
The tiny pause in borrowing circa 2008-09 almost collapsed the global financial system. If this is your idea of a stable, sustainable trajectory, what are you high on?
This chart of federal debt is outdated-- federal debt has far exceeded $20 trillion. A trillion here and a trillion there, pretty soon you're talking debt levels that insure a devaluation of the currency or a collapse of the entire-debt-dependent system.
Before we get all giddy about the soaring stock market, let's remember what's been driving it higher--central banks creating trillions out of thin air and using the "free money" to buy stocks and bonds.
Corporations have been gorging on low-cost debt to fund stock buybacks, which push share prices higher, rewarding insiders and the already-wealthy who own the majority of financial assets.
Speaking of insanely destabilizing and unsustainable trajectories--take a look at wealth inequality: the top 1% (actually, the top .5%) have skimmed the vast majority of the past decade's gains, the top 5% have gathered most of the remaining crumbs, the next 15% (between 80% and 95%) have illusory gains solely based on bubble valuations, and the bottom 80% have lost ground.
Anyone who thinks exponentially rising debt and staggering wealth/income inequality are stable and sustainable is taking way too much Ibogaine. Magical thinking doesn't actually change reality or make the unsustainable sustainable.
These charts reflect a linear system that is wobbling into the first stages of non-linear destabilization. What is unsustainable and unstable will destabilize, slowly at first, and then rapidly as all the buffers creating the illusion of stability give way.
Our "wealth" is as illusory as the fantasy that ever-expanding trillions of dollars can be borrowed annually for decades to come, with no consequence.
The system collapses if we trim borrowing, and it collapses if we keep borrowing more every year. There is no middle ground, no Goldilocks state where we can borrow just enough to squeak by. That appears possible in a linear system, but once it shifts into non-linear dynamics, that fantasy will quickly be destroyed.


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