Wednesday, April 29, 2020

The Pandemic Is Deepening America's Many Divides

And so we've reached the precarious state of disunion in which the only thing the warring elites can agree upon is that the Federal Reserve should rescue their private wealth, regardless of cost or consequences.
America's divides are proliferating and deepening by the day. The key political and economic divides predate the pandemic, but the pandemic is acting as a catalyst, creating new divides and exacerbating existing ones.
Let's start with the politicization and subsequent polarization of re-opening the economy. In a reasonably sane, coherent society, this issue would be subject to common sense debates about risks, trade-offs, policies, responses to new data, etc.
But American society is neither sane nor coherent, so what should be a non-partisan debate was immediately politicized, to the absurd extreme that "progressives" must favor continuing strict lockdowns lest they be accused of being "conservative."
The erosion of middle ground and the disappearance of de-politicized policy debates is a clear sign that a society is doomed to disintegration not just of the social order but the political and economic orders.
Author Peter Turchin has described the disintegrative stage in his book Ages of Discord, in which he modeled a Political Stress Index comprised in part of these three dynamics:
1. Stagnating real wages due to oversupply of labor.
2. Overproduction of parasitic elites.
3.Deterioration of central state finances.
The pandemic has catalyzed the oversupply of labor and the deterioration of central state finances, and illuminated America's vast overproduction of parasitic elites, most of whom feed off various cartels and monopolies or the financial system, which has been saved yet again from gravity by the super-wealthy's most important protector, the Federal Reserve.
The pandemic has created new divides that highlight existing extremes of inequality. Those Americans in poor health and in jobs that cannot be performed at home are at greater risk than healthy Americans who can work at home.
Those Americans whose regular pay was considerably less than unemployment plus the federal bonus have zero financial motivation to return to work, while overpaid parasitic elites are getting paychecks even if they're performing little or no work.
The top 10% who own 90% of all assets are breathing a sigh of relief that the Federal Reserve printed up a couple of trillion dollars to save the stock market from a well-deserved collapse, while the bottom 80% who own a tiny slice of America's wealth are not directly impacted by the market's swoon or recovery.
The top 10% has financial reserves to smooth out any disruptions arising from the pandemic and policy responses, while the majority of the bottom 80% have few if any reserves or resources to tap.
Meanwhile, the splintering of America's failing elites has been amplified by the pandemic. The moral decay of the elites is as visible as their insatiable greed. 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. We can see both complacency and intellectual sclerosis in the elites' response to the pandemic.
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.
And so we've reached the precarious state of disunion in which the only thing the warring elites can agree upon is that the Federal Reserve should rescue their private wealth, regardless of cost or consequences. America is doomed, not because its citizenry is incapable of adaptation, but because its ruling, warring elites are incapable of surrendering any of their wealth, power or control, or allowing anything to threaten their precious cartels and monopolies, starting of course with the key controlling monopoly, the Federal Reserve.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Tuesday, April 28, 2020

With Superfluous Demand in Free-Fall, What's the Upside of Re-Opening a Small Business?

Since superfluous demand was the core driver of most consumer spending, and that demand is in free-fall, what's the upside of re-opening?
The mainstream view assumes everyone will be gripped by an absolutely rabid desire to return to their pre-pandemic frenzy of borrowing and spending and consuming, the more the better. While the urge to believe the Titanic scraping the iceberg will have no consequence and the collision was nothing but a spot of bother is compelling (so party on!), many people will reassess their pre-pandemic lives and ask: do I really want to go back to circling the pavement in a dead end?
Being away from the crazy-busy churn invites reassessment, especially for small business owners who are facing the near-certainty of uncertain sales and still-high fixed costs.
When we're embedded in the crazy-busy churn, we're only trying to get through the day. Once we're removed from the pressure-cooker of running the business, we start wondering: is this craziness what I want to spend the rest of my life pursuing? For what gain? Do I really love my business and my customers/clients, or am I just telling myself that I love my business and my customers/clients as duct tape to keep the whole contraption from flying apart?
Then there's the question of Superfluous Demand, a topic Max Keiser and Stacy Herbert and I discussed in their recent Double Down podcastSuperfluous demand is demand that's a manifestation not of what we might call authentic or organic demand for essentials but demand driven by cheap credit and the consumerist mania to fill the insatiable black hole of insecurity inside every debt-serf to raise their publicly posted social status with an endless stream of aspirational goods and services that shout "Look at me! I have the same things and experiences the top 5% have!"
But sadly, no amount of aspirational goods and services will fill the insecurity or create an authentic positive social role, or express an authentic selfhood that exists outside of the consumerist definition of "self" as nothing more than a consuming machine.
Every business owner and manager has to anticipate a decline in superfluous demand as incomes decline and credit tightens, and households and enterprises recalibrate their exposure to risks of further downside and forego spending in favor of rebuilding a cash reserve. How severe the drop in demand will be correlates with how much of their pre-pandemic sales were manifestations of superfluous demand.
Entertainment, travel and a vast array of consumables were virtually all superfluous, so the decline in superfluous demand will be consequential to virtually every business.
But humans are not just consuming machines generating superfluous demand with credit. Humans have to create the goods and services, and that is an intrinsically risky process. Decisions have consequences, and those consequences weigh heavily on those who are accountable: managers, executives and especially owners, who must cover expenses with their own personal cash if the enterprise's expenses exceed its net income.
Only owners and previous owners of small businesses know what this potential for personal loss and bankruptcy feel like. Very few of the punditry and corporate media commentators have personal experience in running a business, and especially one on the knife edge between covering expenses and losing money. To all these media commentators, "small business" is an abstraction.
Employees also have no idea what it's like to be responsible for losses and accountable for decisions that may make or break the enterprise.
Which brings us to the asymmetrical impacts of owners, managers and essential workers in the economy, which is effectively a complex network of critical nodes that all the millions of network participants depend on. Examples include oil refineries, nuclear power plants and slaughterhouses.
The fewer the number of these essential nodes, the more consequential the impact when one or more go offline. Put simply: not all nodes are equal in their impact.
This dynamic is also present in human capital: if a small business has 10 employees, the business will survive the loss of an employee, but it won't survive the loss of the owner. A region can survive 500 white collar workers not showing up for work, but if 500 slaughterhouse workers don't show up for work, meat production in the region falls to near-zero.
Blinded by their absence of real-world experience, the financial punditry devote their attention to the trillion-dollar Big Tech behemoths, as if they dominate the economy because they're so incredibly overvalued by Wall Street.
But in the real world, Big Tech's share of the work force is essentially signal noise. A tiny sliver of the 150 million people with earned income in the U.S. toil for a Big Tech company.
Who really matters in terms of employment and earned income are small business owners, not the Big Tech monopolies.
Which brings us back to the owner who's wondering if they want to return to the heavy burdens and crazy-busy churn of a business that may well lose money or flounder for years. What's the pay-off for working extra hours because you can't afford to hire back all your previous staff? What's the payoff as rents, healthcare, fees, taxes and the cost of goods all increase while customers balk at any increase in your own prices? Is struggling to survive really what I want to spend the rest of my life doing? And for what? To slowly go bankrupt?
Small business is not a financial abstraction. It is real people who were often burned out even before the pandemic and who are now wondering if it's wiser to bail out now and close the doors rather than endure a slow side into bankruptcy and exhaustion.
Since superfluous demand was the core driver of most consumer spending, and that demand is in free-fall, what's the upside of re-opening? Isn't it more prudent to close up now and preserve whatever capital and health one still has, and pick a way of life that doesn't require meeting payroll, paying outrageous rents and being liable for calamities that are outside of your control?
Can we be honest, and note that for many owners and managers, their pre-pandemic life was nothing more than a crazy-busy dead end? Why continue the struggle now with even heavier burdens and greater risks, and for what gain?
I'll tell you what: if "small business" is so great and profitable, then how about you go plunk down thousands of dollars for rent, healthcare, payroll for employees, tax payments, insurance, fees, and on and on, and then take your chances that superfluous demand hasn't dried up and blown away.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Monday, April 27, 2020

The Crash Has Only Just Begun

Everything, including a rational, connected-to-reality, effective financial system, is on back-order and unlikely to ship any time soon.
While the stock market euphorically front-runs the Fed and a V-shaped recovery, the reality is the crash has only just begun. To understand why, look at income and debt. Income--earned and unearned--is in free-fall, while debt--which must be serviced by income--is exploding higher.
Bailouts are not a permanent substitute for income. In the short-term, bailouts--in the form of payments to everyone who's lost their source of earned income, i.e. their job--is a necessary substitute for lost income. But longer term, subsidizing income with borrowed money weakens the currency and the economy, as productivity stagnates.
As for servicing debt--the unemployed working class is getting an extra $600 a week not out of kindness but to make sure these households can continue to service their debts: auto and truck loans, student loans, credit cards, etc. Absent a federal bailout, millions of unemployed would cease making loan payments, creating a financial crisis for lenders.
Investment income is also crashing as companies slash dividends and stock market gains dry up. Oil exporters are facing a $1.2 trillion cut in annual income, and institutional property owners are facing steep declines as tenants stop paying rent and structural declines in employment will pressure rents lower in housing and commercial properties.
As the housing market implodes, capital gains from flipping houses will also collapse. As Corporate America realizes it no longer needs vast office spaces for its (reduced) workforce as millions are working from home, the demand for commercial properties will fall off a cliff, and the rental income generated by commercial property will also fall off a cliff.
Even if interest rates fall to zero, the interest paid by borrowers will not be zero. But even if borrowers get very low rates, they still have to make the monthly principal payments, which can each run into the hundreds of dollars. Lowering interest rates doesn't reduce the principal payments or reduce the interest due to zero. Indeed, the student loan and credit card rackets are experts at sucking borrowers dry with late fees and much higher rates than initially advertised.
Capital isn't flowing into productive investments; it's front-running the Federal Reserve's free money for financiers in grossly overvalued stocks and seeking "dead money" safe havens.
The money that's being sent to unemployed workers is borrowed, and small businesses are being offered loans, much of which will be forgiven if the funds are used to pay wages. In other words, all of these trillions of dollars being substituted for earned income are borrowed, and with capital going to grossly overvalued Big Tech stocks and "dead money" safe havens, there are no capital flows which will support a return to commerce and productivity that will pay wages or generate investment income (unearned income).
Bulls can argue that "this time it's different," that debt doesn't matter and earnings don't matter, but where is the history to support their claim that capital flowing into overvalued stocks is going to generate earned income that can service the exploding debt load?
The crash has only just begun. Everything, including a rational, connected-to-reality, effective financial system, is on back-order and unlikely to ship any time soon.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Friday, April 24, 2020

No, This Is Not Another 1929, 1973, 1987, 2000, or 2008

Basing one's decisions on analogs from the past is entering a fool's paradise of folly.
Like addicts who cannot control their cravings, financial analysts cannot stop themselves from seeking some analog situation in the past which will clarify the swirling chaos in their crystal balls. So we've been swamped with charts overlaying recent stock market action over 1929, 1987,2000 and 2008--though the closest analogy is actually the Oil Shock of 1973, an exogenous shock to a weakening, fragile economy.
But the reality is there is no analogous situation in the past to the present, and so all the predictions based on past performance will be misleading. The chartists and analysts claim that all markets act on the same patterns, which are reflections of human nature, and so seeking correlations of volatility and valuation that "worked" in the past will work in 2020.
Does anyone really believe the correlations of the past decade or two are high-probability predictors of the future as the entire brittle construct of fictional capital and extremes of globalization and financialization all unravel at once?
Here are a few of the many consequential differences between all previous recessions and the current situation:
1. Households have never been so dependent on debt as a substitute for stagnating wages.
2. Real earnings (adjusted for inflation) have nevet been so stagnant for the bottom 90% for so long.
3. Corporations have never been so dependent on debt (selling bonds or taking on loans) to fund money-losing operations (see Netflix) or stock buybacks designed to saddle the company with debt service expenses to enrich insiders.
4. The stock market has never been so dependent on what amounts to fraud--stock buybacks--to push valuations higher.
5. The economy has never been so dependent on absurdly overvalued stock valuations to prop up pension funds and the spending of the top 10% who own 85% of all stocks, i.e. "the wealth effect."
6. The economy and the stock market have never been so dependent on central bank free money for financiers and corporations, money creation for the few at the expense of the many, what amounts to an embezzlement scheme.
7. Federal statistics have never been so gamed, rigged or distorted to support a neofeudal agenda of claiming a level of wide-spread prosperity that is entirely fictitious.
8. Major sectors of the economy have never been such rackets, i.e. cartels and quasi-monopolies that use obscure pricing and manipulation of government mandates to maximize profits while the quality and quantity of the goods and services they produce declines.
9. The economy has never been in such thrall to sociopaths who have mastered the exploitation of the letter of the law while completely overturning the spirit of the law.
10. Households and companies have never been so dependent on "free money" gained from asset appreciation based on speculation, not an actual increase in productivity or value.
11. The ascendancy of self-interest as the one organizing directive in politics and finance has never been so complete, and the resulting moral rot never more pervasive.
12. The dependence on fictitious capital masquerading as "wealth" has never been greater.
13. The dependence on simulacra, simulations and false fronts to hide the decay of trust, credibility, transparency and accountability has never been so pervasive and complete.
14. The corrupt linkage of political power, media ownership, "national security" agencies and corporate power has never been so widely accepted as "normal" and "unavoidable."
15. Primary institutions such as higher education, healthcare and national defense have never been so dysfunctional, ineffective, sclerotic, resistant to reform or costly.
16. The economy has never been so dependent on constant central bank manipulation of the stock and housing markets.
17. The economy has never been so fragile or brittle, and so dependent on convenient fictions to stave off a crash in asset valuations.
18. Never before in U.S. history have the most valuable corporations all been engaged in selling goods and services that actively reduce productivity and human happiness.
This is only a selection of a much longer list, but you get the idea. Basing one's decisions on analogs from the past is entering a fool's paradise of folly.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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