Tuesday, May 21, 2019

Two Intertwined Dynamics Are Transforming the Economy: Technology and Financialization

If you want to understand how the economy is being transformed, look at the intersection of Big Tech, financialization and the central state.
The two dynamics transforming the economy--technology and financialization--are intertwined yet widely viewed as unrelated. Critics and proponents of each largely ignore the other dynamic: critics of institutionalized fraud and other manifestations of financialization implicitly assume the economy will return to some golden age if we get rid of financialization's skims and scams.
They are largely blind to the reality that the speed with which technology is transforming the economy is increasing: there is no golden era to return to. The economy they long for (strong unions, full employment, rising wages, declining inequality, political bipartisanship, financial stability and security, etc.) has already slid into the dustbin of history.
They are equally blind to the reality that the central state they revere as the "solution" to financialization is itself the source of wealth/power asymmetry and the enforcer of Big Tech and Big Finance domination.
Proponents of technology implicitly assume that financialization's skims and scams have no impact on technology's golden promise of glorious advances which both enrich the few who own the technology and free the many to enjoy robots doing their work and endless entertainment (for a modest monthly fee, of course).
They are largely blind to the inconvenient reality that replacing tens of millions of workers with robots and software means there is no longer a mass-consumption economy for all the technological wonders, as the supposed solution--Universal Basic Income (UBI)--can't provide either paid work or enough income for the millions who will be receiving UBI subsistence to borrow or spend enough to keep the consumer economy afloat.
Financialization's solution--creating more credit / debt-- simply insures that the UBI recipients will be devoting much of their subsistence income to debt service rather than tech toys.
In reality, both dynamics reinforce the disruptive effects of the other on non-elites. Financialization concentrates wealth and political power in the hands of those closest to the sources of cheap credit--central banks and private-sector banks.
Financialization enables tech companies to borrow billions on the cheap and use the money to buy back their own shares, increasing the value and further concentrating ownership of the most profitable tech companies.
With billions in profits and credit (via selling low-yield bonds), giant tech corporations have the wherewithal to invest in bleeding-edge technologies--and pay the top researchers sums that cannot be matched by lesser firms.
Companies are faced with Andy Grove's famous summary of technological change: adapt or die. As the chart below illustrates, companies in virtually every sector are being forced to adopt technologies that reduce human labor while increasing productivity. Those who fail to do so effectively enough and soon enough will be outpaced by global competitors.
Unless of course the corporations have enough capital to purchase political power: once a corporation is powerful enough to buy regulatory moats and other forms of political cover, they reap the monopolistic benefits of what analyst Simons Chase calls the negative network effect: they "lock in" their monopoly via regulatory capture and the enforcement of the state.
Consider network effects, the popular economic construct applied to market concentration and increasing returns for strategies pursued by some leading tech companies. This dynamic economic agent is also known as demand side economies of scale.
W. Brian Arthur, the economist credited with first developing the theory, described the condition of increasing returns as a game of strategic positioning and building up a user base to the point where "lock in" of dominant players occurs. Companies able to tap network effects have been rewarded with huge valuations and highly defensible businesses.
But what about negative network effects? What if the same dynamic applies to the U.S.’s pay-to-play political industry where the government promotes or approves of something through a policy, subsidy or financial guarantee due to private sector influence. Benefits accrue only to the purchaser of the network effects, and consumers, induced by the false signal of large network size, ultimately suffer from asymmetric risk and experience what I’m calling a loss of intangible net worth for each additional member after the "bandwagon" wears off.
If this were the case, then you would see companies experience rapid revenue growth (out of line with traditional asset leverage models), executives accumulating huge fortunes and political campaign coffers swelling.
But the most striking feature would be the anti-social outcomes, the ones not available without the instant critical mass of government-supported network effects, the ones that, at scale, monetize a society’s intangible net worth.
In effect, the negative network effect generated by America's pay-to-play political structure creates a winner take most economy in the tech sector that mirrors the the winner take most dynamic of financialization.
Non-elites already live in a winner take most economy--a reflection of asymmetrical concentrations of wealth and power in tech and financial corporations. The commoditization of credit and institutionalized fraud such as corporate buybacks have served to strengthen the negative network effect that arise from the unholy alliance of Big Tech and the central state.
If you want to understand how the economy is being transformed, look at the intersection of Big Tech, financialization and the central state.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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Friday, May 17, 2019

The Normalization and Institutionalization of Fraud

Normalizing and institutionalizing fraud undermines the foundations of the economy and the financial system.
I am indebted to Manoj Samanta (twitter: @flation_debate) for the insightful concept the commoditization of fraud. The first step in the commoditization of fraud is to normalize fraud as Business as Usual (BAU) to the point that it's no longer viewed as "wrong," destructive or an aberration of evil-doers but as an accepted way to maximize gain and offload risk onto others.
The last step in the process is to institutionalize fraud within central banking and government policies.
How is selling shares in a money-losing corporation at outlandish valuations not the commoditization of fraud? The fraud has been normalized into a game of hoping that greater fools will be so enamored of the normalized fraud that they'll take the IPO shares off your hands at ever-higher valuations until the fraud breaks down.
But by then, the instigators of the fraud--the IPO--have escaped with billions in gains and zero liability.
How is private equity loading companies up with debt as a means of paying outlandish dividends to themselves not commoditized fraud? How is paying dividends with debt rather than earnings not fraud? The net result of this fraud is the debt-burdened company eventually defaults on its debt, defrauding the investors who were suckered into the scam.
But once again, the instigators of the fraud--private equity--have escaped with billions in gains and zero liability.
How is understating inflation so Social Security retirees get near-zero cost of living adjustments as real-world inflation pushes 7% not normalized, institutionalized fraud? We all understand the motivation for this institutionalized fraud: to limit the increasing cost of Social Security and mask the erosion of household income's purchasing power.
While the Social Security recipient and the minimum wage worker are getting squeezed, those getting nearly free money from the Federal Reserve to plow into stocks are piling up trillions of dollars in gains. How is the Fed's fee money for financiers not commoditized, institutionalized fraud? Those who can borrow outlandishly large sums at a discount are in effect being given the tools to defraud the financial system and all the other players who aren't as close to the money spigot of the central bank.
How is charging 20% interest on a credit card balance while financiers pay 2% not commoditized, institutionalized fraud? The cover for this fraud is particularly rich: the high credit risk of the credit card holder demands a high rate of return, while the "low-risk" financier gets 2% financing to blow up the entire financial system and get bailed out by the taxpayer.
Normalizing and institutionalizing fraud undermines the foundations of the economy and the financial system. Calling these commoditized frauds business as usual doesn't mean they won't destroy the system from the inside.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. 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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Thursday, May 16, 2019

Downward Mobility Creates "Deplorables"

The real heresy here is the American economy is now rigged for downward mobility.
In the conventional narrative, one's economic class is overshadowed by one's political belief structure: liberal, conservative, libertarian, etc. In terms of economic class, the conventional narrative divides people into their ideological beliefs about economic ideologies: free market capitalism, socialism, etc.
Economic class is one of the few remaining heresies in America: in the conventional narrative, it doesn't exist or is meaningless due to the tremendous social mobility of the American populace: the working class stiff is one wise decision way from middle class status, and the middle class worker is one wise investment away from becoming wealthy.
What the conventional narrative purposefully ignores is the potential for downward mobility, in which one bad decision or investment triggers a drop in economic class and future financial prospects. I've been writing for years about the diminishing number of slots in America's upper middle class, and the realities of diminishing social mobility has been documented by research.
As the recent college admissions scandal has highlighted, those already in the upper middle class have privileges such as alumni preference denied the lower classes. Those who already own assets have profited immensely from the credit-bubble economy while those without assets have been priced out and squeezed by relentless increases in rent, healthcare, childcare etc.
The heresy I'm proposing here is one's economic class matters more than one's purported ideological or political beliefs. The second half of my heretical proposal is that one's political leanings divide very neatly along a single fault line:
Are your economic-financial prospects brightening or diminishing? Put another way: are you more likely to experience downward mobility (the reality for most in the bottom 90% and even many in the top 10%) or the conventionally expected upward mobility?
Those who recognize their precarious hold on their current economic class and the increasing risks of downward mobility are the infamous "deplorables", those who are voting for non-mainstream candidates left and right, voting for national interests over globalization and so on.
The slippery slope from upper middle class to lower middle class is greased by the neoliberal boom-bust nature of the global economy: buy at the top and be forced to liquidate at the bottom and the entire household's wealth can be wiped out.
When a two-earner household that counts on two high incomes is downsized to one good income and one precariat income--low wage, unpredictable hours, no benefits-- the sharp decline in income triggers a cascading decline of security.
In a credit-bubble boom-bust economy, everyone must become a brilliant, savvy trader/gambler or they risk losing it all. This is true not just of investment decisions but of career decisions, decisions to buy or sell a home, decisions to move to another region, decisions to have a child and so on.
As a general rule, the top 20% support the status quo because the status quo works well for them: they own assets, they feel secure in their jobs, and they feel they are upwardly mobile.
Interestingly, wealth and income don't matter as much as we suppose. Those with high incomes and substantial wealth who feel vulnerable to downward mobility are much more critical of the status quo and more likely to vote along "deplorable" lines for outsider candidates.
The real heresy here is the American economy is now rigged for downward mobility, which fuels the rise of the "deplorables" who recognize downward mobility is the real new normal. Only the protected class with secure jobs support the status quo without question, but as the recession takes hold and deepens, and the credit-bubble bursts and assets decline rather than loft ever higher, the percentage of the populace who awaken to the precariousness of their economic class status will soar.
The greatest sin in America is to recognize downward mobility is now like gravity: the upper-middle class household that loses a high-paying job and places the wrong bet in the credit-bubble casino is one slippery step from becoming a "deplorable."
This dissolution of conventional ideological loyalties terrifies the ruling elites, for it threatens to dissolve their control of the masses. When the SillyCon Valley engineer gets laid off and loses the illusion of upward mobility, when the government worker who was promised a generous pension and bennies discovers that the bankrupt local government can no longer pay what was promised, the ranks of the "deplorables" will swell with self-reinforcing momentum.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. 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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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Tuesday, May 14, 2019

The Economy Has Fundamentally Changed in the 21st Century--and Not for the Better

The net result is we have an economy that's supposedly expanding smartly while our well-being and financial security are collapsing.
Gross Domestic Product (GDP) and other metrics of economic activity don't measure either broad-based prosperity or well-being. Elites skimming financialization profits by expanding corporate debt and issuing more loans to commoners while spending more on their lifestyles boosts GDP quite nicely while the security and well-being of the bottom 90% plummets.
Under the hood of "recovery" and a higher GDP, life has gotten harder and more insecure for the bottom 90%. The key is not to look just at wages (trending up, we're assured) or inflation (near-zero, we're assured) but at aspects of daily life (lived experience) that cannot be captured by conventional economic / financial attempts at quantifying the economy.
How do we quantify the cost of the financial anxiety provoked by huge insurance deductibles or staggering healthcare bills? What matters isn't just whether the patient or their family has to declare bankruptcy because they can't afford the enormous co-pays: what matters is the debilitating stress caused by having to decide between risking an operation and bankrupting the family or foregoing the operation and hoping for a miracle.
Or how about the eventual cost of foregoing healthcare except in emergencies due to having to pay cash for any care due to the high deductibles?
Small stresses add up, leading to chronic stress and a host of debilitating consequences. Consider the daily commute to work, which has become longer and more stressful due to increasing congestion and the limits of public transport infrastructure that hasn't been improved or expanded in decades.
Why New York City Stopped Building Subways (via Mark G.) Unlike most other great cities, New York’s rapid transit system remains frozen in time: Commuters on their iPhones are standing in stations scarcely changed from nearly 80 years ago.
Then there's financial insecurity. Where is the measure of financial insecurity? How do we quantify the erosion of secure pensions and stable home prices? The average Social Security monthly benefit for 2019 is $1,462, which isn't enough to rent a studio in many urban areas, and tens of millions of lower-income retirees receive considerably less than this princely sum.
The family home remains the mainstay of middle-class wealth, but its value is now determined by credit bubbles and busts and the relative burdens of property taxes. In the pre-financialization / pre-neoliberal era, house prices tended to rise by a modest percentage over time, more or less the equivalent of a savings account drawing interest as the homeowner paid down the principal and accrued equity.
Now every homeowner has been transformed into a gambler who must time the market swings when buying or selling. One mistake can wipe out decades of paper gains. How do we quantify this erosion of the reliability and safety of homes' market valuations?
Everyone with their retirement savings in a 401K or IRA is also now a gambler whether they accept that reality or not. In a global economy of historically low yields on safe investments such as government bonds, households playing it safe are punished with near-zero or negative returns, while households that put all their money oin the stock market roulette game have been richly rewarded to date.
But the security of stock market gains is illusory: rather than reflect the fundamentals of the corporations, stock valuations reflect the Federal Reserve's decision to make the stock market the signifier of economic growth: if the market is rising, the economy is doing well.
Why did they do this? Manipulating stocks higher is easy: just push low-cost liquidity into the financial system and much of it will end up in stocks or corporate buybacks which boost shares valuations by reducing the number of shares outstanding.
The other factor is the concentration of stock ownership in the politically powerful hands of elites. Should the market threaten to crash, wealthy donors and their lobbyists will let the regulators and politicos know they're not happy that their enormous wealth is at risk of dwindling.
Fed goosing and corporate buybacks are not solid foundations. All such manipulations eventually founder on the shoals of reality, and everyone who thought their retirement funds in stocks was as safe as a savings account will discover that risk can be masked but it can't be made to disappear.
The Neoliberal Project of making everything into a tradable market has dominated the 21st century economy. The concept is appealing: by making everything into a competitive market, prices will drop as efficiencies and innovations take hold, and financial markets will benefit as everything that's being commoditized can be packaged, marketed and sold globally.
So a designed-to-default subprime mortgage security can be sold to a pension fund in Norway as "low-risk," heh.
This happy story of the wunnerful benefits of turning everything into a tradable market is not what actually happened. What actually happened is that the new markets were quickly dominated by monopolies and cartels, and previously safe assets were financialized and securitized, in effect stripmining the unwary of their income and assets.
Neoliberal financialization and Fed goosing of risk assets are why the nation's wealth has become increasingly concentrated in the hands of financial elites.As you can see in the charts below, the gains reaped by the top 10% were concentrated in the top 1%, and the gains of the top 1% have been concentrated in the top .01%.
As I noted in Burnout Nation, the precarious nature of employment and rising workloads are reducing well-being across the board. Again, the tools to accurately quantify the internal states of security and well-being are not the equivalent of measuring GDP: much of the data comes from self-reporting, which is skewed by Americans' belief that everybody should be upbeat and positive, so we tend to report what others want to hear.
The net result is we have an economy that's supposedly expanding smartly while our well-being and financial security are collapsing. As I often note here: we optimize what we measure, and if we measure what doesn't really matter then we're optimizing the wrong things.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. 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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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

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Monday, May 13, 2019

Burnout Nation

The economic and financial stresses will exceed the workforce's carrying capacity in the next recession.
A number of recent surveys reflect a widespread sense of financial stress and symptoms of poor health in America's workers, particularly the younger generations. There's no real mystery as to the cause of this economic anxiety:
-- competition for secure, well-paid jobs that were once considered the birthright of the middle class is increasingly fierce;
-- the pay and predictability of the jobs that are available are low;
-- high-paying jobs are extraordinarily demanding, forcing workers to sacrifice everything else to keep the big-bucks position;
-- the much-lauded gig economy is tracking the Pareto Distribution, as 80% of the income accrues to the top 20%, and those trying to earn a lower-middle class income in the gig economy are working long hours to do so;
-- housing costs are unaffordable in hot job markets;
-- commutes to jobs from lower-cost areas are brutal;
-- student loan debt taken on to earn low-value diplomas is crushing.
These are just the highlights, not an exhaustive list of the common stresses experienced by American workers of all ages.
The inevitable result of these pressures over time is burnout, which anecdotally is reaching epidemic proportions in the U.S. and other nations.
While many of these stresses are unique to private-sector precariats in the gig economy or insecure positions in Corporate America, many public-sector workers in public safety and healthcare are also prone to burnout due to increasing workloads and understaffing.
While government agencies and Corporate America recognize the dangers to productivity posed by burnout, few agencies and companies are taking concrete actions to address the sources. Given that many of the sources are systemic, there is only so much agencies and companies can do; but what they can do may make the difference between workers free-falling into total burnout or being able to manage high levels of chronic stress.
But why should workers tolerate high levels of chronic stress? The alternative--quitting the source of the stress and finding a lower wage, lower pressure livelihood is an increasingly compelling alternative.
The status quo is purposefully blind to the systemic dangers of burnout because it depends on obedient workers producing wealth, paying taxes and taking on debt to buy more stuff. As I have noted recently, the most productive workers with digital / remote work skills have the most to gain by bailing out of the long commute / overwork / unaffordable housing rat race and establishing a lower-cost, lower stress life elsewhere.
Since the high-income workforce pays the lion's share of income and other taxes, a mass exodus of burned out high-productivity workers will cause shortfalls in tax revenues and in creditworthy buyers of overpriced housing in high-stress coastal urban regions.
Burnout isn't limited to highly paid workers; lower paid workers holding down multiple jobs are carrying enormous burdens of chronic stress.
The economic and financial stresses will exceed the workforce's carrying capacity in the next recession. In terms of chronic stress and economic insecurity, the recession of 2008-09 never ended for many workers; rather, the burdens have increased and the damage wrought by unrelenting stress is reaching the critical point of failure, where stress cascades into total burnout and the abandonment of jobs not by choice but by necessity.
Depression, fatigue, burnout and stress are all related, and the plethora of self-help columns aimed at relieving stress don't recognize the systemic burdens placed on workers: rather than tell overworked employees and small business owners they should meditate at 5 am before starting their commute, the entire system needs to be overhauled.
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. 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. New benefit for subscribers/patrons: a monthly Q&A where I respond to your questions/topics.

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