Wednesday, October 30, 2019

The Political Parties and the Media Have Abandoned the Working "Middle Class"

Where is the line between "working class" and "middle class"? Maybe there isn't any.
Defining the "middle class" has devolved to a pundit parlor game, so let's get real for a moment (if we dare): the "middle class" is no longer defined by the traditional metrics of income or job type (blue collar, white collar), but by an entirely different set of metrics:
1. Household indebtedness, i.e. how much of the income is devoted to debt service, and
2. How much of the household spending is funded by debt.
3. The ability of the household to set aside substantial savings / capital investment.
4. The security of the households' employment.
5. The dependence of the household wealth on speculative asset bubbles inflated by central bank policies.
6. The percentage of the household income that is unearned, i.e. derived not from labor but from productive assets.
7. The exposure of the households' employment to automation, AI or offshoring.
8. How much of the household income is government transfers: benefits, subsidies, etc.
After writing about the middle class and America's class structure in depth for over a decade, it seems to me the actual, real-world class structure is something along these lines:
1. No formal earned income, dependent on government transfers, possibly supplemented by informal "black market" income; no family wealth.
2. The Working Poor, those laboring at minimum wage or part-time jobs with few if any benefits. This class depends on government transfers to get by: EBT (food stamps), housing subsidies, school lunch subsidies, Medicaid, etc. Highly exposed to reductions in hours, tips, gigs, etc. and layoffs.
3. The "muddle class" which muddles through on earned income, much of which goes to debt service (student loans, auto loans, mortgages, credit cards) and skyrocketing big-ticket expenses: rent, healthcare, childcare, etc. Unable to save enough to move the needle on household capital, any net worth is dependent on speculative asset bubbles continuing to inflate. Highly exposed to layoffs or destabilizing changes in employment status: from full-time to part-time, loss of benefits, etc.
This article from WSJ.com describes the Muddle Class: Families Go Deep in Debt to Stay in the Middle Class
4. The Protected Class with secure income/earnings and benefits: this includes the nomenklatura of government employees, mid-level technocrat / managerial employees in academia, government-funded non-profits, etc., and retirees with Medicare, Social Security and other income (pensions, unearned investment income, etc.) and family assets (home owned free and clear, substantial 401K nest eggs, etc.)
5. "Winner Take Most" Corporate America / market-economy households: top managers and salespeople, entrepreneurs, successful business owners, speculators in financialization/asset bubbles, marketers, those earning substantial royalties, etc. Most work crazy-hard and make sacrifices, as per this article from The Atlantic: Why You Never See Your Friends Anymore: Our unpredictable and overburdened schedules are taking a dire toll on American society.
6. The wealthy and super-wealthy. Many continue working hard despite being worth tens of millions or hundreds of millions of dollars, as per this article from NYT.com: Why Don’t Rich People Just Stop Working? Are the wealthy addicted to money, competition, or just feeling important? Yes.
7. The upper reaches of this class constitute a Financial Aristocracy / Oligarchy / New Nobility, those who have leveraged mere wealth into political, social and financial power.
8. The Mobile Creatives Class, currently small but expanding, which essentially obsoletes the entire status quo of working for an employer (often to get benefits), going heavily into debt for a college degree, vehicle, house, wedding, etc., hiring employees and paying outrageous prices to live in an overcrowded, soul-destroying city, etc.
I've written often about Mobile Creatives, but the basic idea is multiple income streams and forms of capital provide security rather than depending on the state or an employer: Career Advice to 20-Somethings: Create Value as a Mobile Creative.
Where is the line between "working class" and "middle class"? Maybe there isn't any. The old definitions of working and middle class were social more than financial--the middle class was better educated (school teacher, etc.) than the working class (factory worker, skilled tradesperson) but both could aspire to owning a home and giving their children a more secure life than they had started with.
The working class was not limited to the working poor: working-class jobs provided security and social mobility, just like white-collar middle class jobs.
What differentiates classes now is debt, employment security and the ability to build household capital that isn't just a sand castle of speculative bubble "wealth." The worker with tradecraft skills (welding, logger, etc.) has more security and earning power than a college graduate with few skills that can't be outsourced or automated.
Many college graduates work in sectors that are highly exposed to layoffs and downsizing once the economy contracts: food and beverages, hospitality, etc.
All of which leads us to a highly verboten conclusion: both political parties and the corporate media have abandoned the 2/3 of the workforce that is working/middle class. The bottom 20% dependent on government transfers has more security than those earning just enough to disqualify the household for transfers, while the top 15% in the Protected Class are doing just fine unless they're over-indebted.
The winner take most class and the wealthy dominate both political parties and the media which is now dependent on advertising that appeals to the top 10% of households that collect more than 50% of the national income.
The political parties take care of the government dependent class to keep the rabble from rebelling, and they keep the government gravy train flowing to the Protected Class (healthcare, national defense, academia, government employees) to insure their support at election time, but they take their marching orders from the Aristocracy / Oligarchy that fund their campaigns and enrich them with $100,000 speaking fees, seats on the board of directors, etc.
The Working/Middle Class gets nothing but lip-service, and that's been the case for decades. The political parties and the media abandoned the Working/Middle Class long ago, buttering their bread with the soaring wealth of the Aristocracy / Oligarchy and relegating everyone outside the Protected Class who labors for their livelihood to the servitude of politically impotent tax donkey / debt-serfdom.
Please examine these charts closely. They look busy but show that income inequality has been rising for over three decades.
Here's income by quintile. The top 5% have done extremely well, the Protected Class 15% below them have done just fine, and the bottom 80%, well, who cares about them as long as they're politically passive and make their loan payments?
Cumulative income reveals the widening gap between the bottom 80% and the top 5%. The gap was not very big in the early 1990s, but look at it now:
Another chart of the top 5% pulling away from the rest of us:
No wonder the media depends on luxury/aspirational advertising: the top 5% are the only ones with the money and credit to blow on status-signifying fripperies:
Where does this lead? To this--a collapse of buffers: debt is not income, and eventually the buffers of borrowing more to keep afloat thin and break down. When the financial buffers of the middle two-thirds of working / middle class households break down, the economy and the social-political order will break down, too.
Don't think it won't happen just because it hasn't happened yet.


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 5:37 PM

Tuesday, October 29, 2019

Has California Lost The Mandate of Heaven?

At that point, it's too late: there's no bid for overpriced decaying bungalows, overpriced tech stocks, etc.
In Chinese history, natural disasters were viewed as portents that the The Mandate of Heaven (tianming or "Heaven's will") had been withdrawn from the ruling dynasty. Broadening this concept a bit to regional dominance and power, we might ask: has California lost the Mandate of Heaven?
How many conflagrations does it take for it to sink in that the Golden State has lost its lustre in some profoundly karmic fashion?
How many messes of human excrement on our doorstep does it take to realize the situation will never get better, it can only get worse--much worse?
How many power blackouts, traffic gridlocks and mandatory evacuations does it take for those in denial to accept that the Mandate of Heaven has been withdrawn?
Young residents of the state have never experienced the velocity and depth of California's famous busts. The last real spot of bother in California's economy occurred almost 30 years ago in the early 1990s. Since then, it's been one boom after another.
California's cycles of enormous booms followed by equally gargantuan busts date back to the first Gold Rush. The eventual collapse of mining shares and overpriced real estate in San Francisco was epic, and Mark Twain's account of his chest full of mining shares going from a tidy fortune to zip-zero-nada is a rueful reminder of how quickly fortunes can turn in the land of boom and bust.
It's deceptively easy to take a pencil and ruler and extend a boom into infinity: the number of iPhones sold (always up), Apple's quarterly earnings (always up), property tax revenues (always up) stocks' multiple expansion ((always up) and so on.
California's vast chattering class has ridden the IPO/VC/tech-monopoly/ stock buyback bubble for so long that it can't believe the bubble could ever burst. This class lives in enclaves protected from human excrement, the addicted and the deranged, and in an information enclave of me-too tech/entertainment boosterism.
But as Benoit Mandelbrot showed in his book The (Mis)behavior of Markets, markets and human behavior are inherently fractal, i.e. chaotic, which means there are limits on the predictability of markets and economic trends.
Thus the chattering class has no inkling that the masses can cancel their Netflix, Disney and Apple subscriptions as easily as they signed on. Once jobs, tips, bonuses and gigs dry up, the tech-entertainment giants will find expenses are still rising while revenues are cratering. Once revenues and profits crater, it's harder for management to justify borrowing billions more to fund more stock buybacks.
Extending booms into infinity doesn't track reality. The last real recession circa 1990-1991 blew a $20 billion hole in the California state budget, and accounting for inflation and growth since then, we can expect a $35 - $40 billion hole being blown in the budget once the IPO / tech bubble collapses, as the state is heavily dependent on capital gains taxes for much of its income tax revenues. (There is no long-term capital gains rate in California; all capital gains are taxed as ordinary income, a rate that quickly hits 13.3%.)
Once capital gains dry up, the state is in a fiscal crisis with no solution.
And if the state can't solve the homeless crisis with current spending in the hundreds of millions, then what will happen when the revenues dry up? What will happen if the homeless population doubles or triples? Look at the social havoc generated by the homeless population in San Francisco, which is roughly 1% of the total populace (around 9,000 homeless and a total population of 860,000.)
Phase transitions are intrinsic to systems displaying self-organized criticality such as markets and human behavior. Everything seems fine on the surface, and there's no pressing need to sell the house and move away; there seems to be plenty of time until the phase transition kicks in and suddenly everything has changed for the worse, and so much faster than anyone expected.
At that point, it's too late: there's no bid for overpriced decaying bungalows, overpriced tech stocks, etc. Just like Mark Twain's chest of mining stocks, the transition from being worth a fortune to no-bid near-worthlessness can be sudden indeed once California loses the Mandate of Heaven.
Beneath the surface, pressures are building and resilience is eroding, and when the tipping point is reached the transition will not be gradual and controllable, it will be non-linear and uncontrollable.



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 8:40 AM

Monday, October 28, 2019

Will MMT Work as Intended, Or Will It Trigger the Collapse of "Money"?

MMT is presented as the solution to the "problem" of insufficient government funding, but that's not the real problem.
Modern Monetary Theory (MMT) is presented as a means to painlessly fund the large-scale infrastructure / alternative energy spending the nation needs to rebuild and modernize.
While most people support the goal of useful fiscal stimulus (as opposed to paying people to dig holes and fill them), the question remains: Will MMT work as advertised?
Rather than dismiss it out of hand, I’m trying to approach the subject without ideological bias.
What Exactly Is MMT?
The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity–there is capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.
In other words, the only thing standing in the way of broad-based, socially beneficial spending / progress is a lack of money (funding).
In the view of MMT advocates, a blindingly obvious source of funding is already available: the federal government can issue however much new currency it wants, and so the government could fund large-scale socially useful projects if the political will to do so was present.
We have to pause at this point and distinguish between borrowing money to fund projects, which is the current model, and issuing (printing) new currency.
In the current model, the federal government sells Treasury bonds and uses the proceeds to fund government spending. The Treasury pays interest on the bonds, and this mechanism — interest due on borrowed money — creates a “governor” on spending: as borrowing rises, so do interest payments, and as interest payments rise, this crimps other government spending.
The other mechanism in the current model is the central bank (Federal Reserve) can create currency out of thin air and buy Treasury bonds. This is a form of monetary stimulus, i.e. a way to inject new money into the financial system.
When the central bank creates money out of thin air to buy newly issued Treasury bonds, this is called “monetizing the debt”: in effect, the central bank creates money out of thin air and transfers it to the government by buying Treasury bonds.
The basic idea of MMT (as I understand it) bypasses both paying interest on newly issued money and the artifice of central bank monetization: instead, the Treasury issues new currency directly.
This removes the “governor” of interest payments, freeing the Treasury to issue cost-free currency in virtually unlimited quantities.
The Arguments Against MMT
Various historical studies have concluded that hyperinflation does not occur when governments must pay interest on their debt; the danger with rising interest and debt is default, not hyperinflation.
Hyperinflation arises when the supply of goods and services — the output of the economy — remains roughly the same while the supply of currency skyrockets. As money increases but the sum of goods and services available for purchase remains flat, the value of existing money declines accordingly.
If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency). If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.
Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.
This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.
This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating. This generates inflation, which impoverishes everyone using the currency.
MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But as noted earlier, rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy. Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.
The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.
I honestly don’t see any intrinsic limit on political expediency. Politicians need to be forced to say, “I know your need is legitimate, but the money’s simply not there.” Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn’t an economic process, it’s a political process.
This is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.
A second concern is the entire notion of “slack” in the economy — untapped capacity. Have you noticed the “help wanted” signs in every Home Depot and many other retail outlets and restaurants? We read about millions of people who aren’t working, but if they wanted to work, or had to work, why are there so many unfilled positions? The answers are complex: the wage being offered isn’t sufficient incentive, the unemployed don’t have the requisite skills, etc.
In other words, in some important ways, the economy appears to be very close to full capacity. New programs such as The New Green Deal will basically be poaching experienced workers from existing projects, driving up wages (good for workers) which can generate a wage-price spiral (bad for everyone who can’t demand higher incomes).
My third concern: as someone with 45 years of construction experience, I am keenly aware that the vast majority of the infrastructure and New Green Deal spending many people see as socially beneficial requires skilled labor. Rebuilding bridges, electrical grids, etc. all require highly specialized labor. Installing solar arrays also requires trained workers with physical stamina.
The process of training a large new workforce is time-consuming and expensive, and doesn’t necessarily generate new goods and services. In other words, it’s inherently inflationary as it puts new money into the economy but doesn’t increase the goods and services — at least until the newly trained workforce starts generating goods and services.
My fourth concern is related: ultimately, “wealth” (as measured in new goods and services generated by capital and labor) is generated by increasing productivity, via investment in greater efficiencies.
Much of the spending people want — repairing bridges, supplanting natural gas electrical generation with solar or wind, and so on — are not necessarily increasing productivity: the repaired bridge carries the same number of vehicles as it did before, so there is no increase in productivity.
In other words, efficiency and productivity are core dynamics, yet the MMT process is fundamentally political, and politics has little interest in efficiency or productivity. It is, as noted above, politically expedient, with a default setting to put off tough decisions into the future.
In the private sector, return on capital and the productivity of labor and processes are the core dynamics. These rationalize decisions to prioritize efficient use of capital, labor and resources. Absent this rationalization, resources can be squandered for politically expedient reasons. In other words, capital, resources and labor can be mal-invested, which brings up the opportunity cost: all the capital, labor and resources squandered on “bridges to nowhere” and other pork-barrel projects are no longer available for truly productive use.
The key question here is: How do we harness our intrinsically scarce capital, labor and resources to increase productivity and socially/ecologically beneficial investments in a sustainable way?
MMT’s diagnosis is that a lack of currency is the primary problem. The MMT solution assumes the new currency can be efficiently invested within the existing political system without disrupting the increasingly precarious existing financial system.
While the appeal of MMT is self-evident, it seems to me that both the financial and political systems are broken in ways that MMT, no matter how it’s managed, cannot fix.
The problem is we’re misallocating capital, resources and labor on a vast scale. That’s the problem. Adding more currency and capacity/”growth” doesn’t fix this problem, it actually makes it worse.
If we look around at the trillions of dollars in recently issued currency floating around the world looking for a yield, the trillions poured into asset bubbles that only benefit the few at the top, the billions of gallons of fuel wasted in traffic jams and other consequences of “endless growth on a finite planet”, the gargantuan waste of capital, resources and labor squandered in maintaining a “growth at any cost” Landfill Economy of mindless consumption, regardless of consequences, it’s hard not to see MMT as a “green” Band-Aid for a profoundly broken, wasteful, unsustainable system.
MMT leaves the existing status quo essentially untouched and adds a new layer of newly issued currency and spending, and a new layer of “growth” and consumption, consumption that no matter how socially beneficial is still an additional burden on the planet.
In effect, MMT is another attempt to preserve a dysfunctional status quo by adding another layer of newly issued currency and “growth.” More “growth,” even the sort envisioned as “Green,” is simply adding to a destructive system. What’s needed is a radical reduction in consumption and a diversion from a consumerist Landfill Economy to one driven by incentives other than “more of everything” in the name of “growth.”
As longtime readers know, I see a new system of private-sector currency, DeGrowth and decentralization and the institutionalization of a more sustainable (i.e. less perverse and destructive) set of incentives as the only set of solutions that can fix what’s broken in the current socio-economic model.
But that doesn’t mean MMT won’t be tried, as the three engines of “growth” over the past 20 years — soaring debt, financialization and globalization — all falter.
To sum up: MMT is presented as the solution to the "problem" of insufficient government funding, but that's not the real problem: the real problem is the purchasing power of the fiat currency that will be issued in the trillions of dollars.
Life Under MMT
So what will life under MMT look like?
In Part 2 — Life Under MMT: A Self-Reinforcing, Inflationary Feedback Loop, we’ll examine the repercussions of the program’s massive new money creation and fiscal stimulus.
This essay was first posted at PeakProsperity.com, where I am a contributing editor.


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


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, Bill G. ($10/month), for your outrageously generous subscription to this site-- I am greatly honored by your support and readership.
 

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Posted by Charles Hugh Smith at 9:25 AM

Sunday, October 27, 2019

Recent Interviews on a Variety of Topics

Here's a list of recent interviews.
Since I do a lot of interviews and don't always post them in a timely manner, here's a list of recent interviews:
Longtime readers have noted the absence of gardening and cooking in recent posts, and so here is a snapshot of the potato harvest from our small tub-garden:
Some of the harvest went into this pan of pommes de terre Lyonnaise:



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


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, Craig H. ($50), for your marvelously generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

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Posted by Charles Hugh Smith at 1:03 PM
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