Tuesday, July 25, 2017

The Two Charts That Dictate the Future of the Economy

If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession.
The stock market, bond yields and statistical measures of the economy can be gamed, manipulated and massaged by authorities, but the real economy cannot. This is espcially true for the core drivers of the economy, real (adjusted for inflation) household income and real disposable household income, i.e. the real income remaining after debt service (interest and principal), rent, healthcare co-payments and insurance and other essential living expenses.
If you want to predict the future of the U.S. economy, look at real household income. If real income is stagnant or declining, households cannot afford to take on more debt or pay for additional consumption.
The Masters of the Economy have replaced the income lost to inflation and economic stagnation with debt for the past 17 years. They've managed to do so by lowering interest rates (and thus lowering interest payments), enabling households to borrow more (and thus buy more) with the same monthly debt payments.
But this financial shuck and jive eventually runs out of rope: eventually, the rising cost of living soaks up so much of the household income that the household can not legitimately afford additional debt, even at near-zero interest rates.
For this reason, real household income will dictate the future of the economy.If household incomes continue stagnating or declining, widespread advances in prosperity are impossible.
The Masters of the Economy have played another financial game to mask the erosion of real income: inflating speculative asset bubbles to boost the illusion of wealth, a form of financial sorcery called the wealth effect: households that see their stock and bond funds swelling by 50% to 100% in a few years are emboldened to believe this phantom "wealth" is permanent and thus can be freely spent in the present.
The problem with this financial shuck and jive is only the top 5% own enough assets to experience the speculative high of asset bubbles. This is one reason why the top 5% have pulled away from the bottom 95%, a trend that is blindingly obvious in this chart of Real Average Household Income by Quintile and the Top 5%from the always-insightful Doug Short (U.S. Household Incomes: A 49-Year Perspective):
The gains since 1992 reflect the national distribution of wealth very closely: those with minimal financial wealth (the bottom 80%) experienced minimal gains in real income.
Those with some financial wealth (the top 20%) enjoyed substantial gains, but the truly outsized gains were reserved for the top 5%, the class that owns the majority of the nation's wealth.
The problem for the Masters of the Economy is that adjusted for inflation, even the incomes of the top 20% and 5% have gone nowhere in the 21st century. If even those households exposed to the enormous gains of this century's two asset bubbles (2002 to 2008 and 2009 to the present) have stagnated, then all the financial shuck and jive isn't trickling down to real income, which is the bedrock of the real economy.
This second chart from Doug Short reveals the period in which the top 20% pulled away from the bottom 80%, and the top 5% pulled away from the bottom 95%. In 1990-92, the gap between the bottom 80% and the top 20% and 5% was modest. The go-go decade of the dot-com boom saw the income of the top 20% pull away from the bottom 80% and the income of the top 5% leave the bottom 95% in the dust.
All that changed in the Financialization Era of 2000 to 2015. Despite two unprecedented asset bubbles, the inflation-adjusted incomes of the top 40% have at best returned to the levels of 2000, while the real incomes of the bottom 60% have fallen dramatically since 2000.
Please note that this data is from the U.S. Census Bureau. Many of the charts one finds on the web (see an example below) of income/wealth inequality are drawn from data collected by Piketty et al., which as many critics have pointed out, does not include government transfers and social welfare programs that are a substantial (and rising) share of household income for the bottom 60%. These include earned income tax refunds, Medicaid healthcare coverage, rent subsidies, direct welfare payments, subsidized school lunches, direct grants for higher education, and so on.
Anecdotally, the sum of these social welfare transfers can double the effective income of low-income households from $20,000 to roughly $40,000 or more. We can quibble about the total value of these transfers and benefits, but they are undeniably substantial and when included, more accurately reflect the real-world income available to lower-income households.
It's also necessary to include capital gains, i.e. income from invested wealth and speculative gains reaped from asset bubbles. Data collected by Piketty et al. includes capital gains.
The point here is that no source of data on income disparity captures all these income streams or equivalents of income. I prefer to rely on I.R.S. tax records as the most reliable and least gamed source of income data, but the I.R.S. doesn't tax Medicaid benefits, rent subsidies, etc., so it seriously under-represents the effective income of lower-income households.
That said, the incomes of the top 20% are mostly taxable and thus more accurately reflected in the data presented here.
If you study these charts closely, you can only conclude that the US economy is doomed to secular stagnation and never-ending recession as long as real income for all segments is stagnating or declining (other than the top of the wealth apex, i.e. the top .5% of households).
Every other economic measure other than real household income is shuck and jive, statistical trickery, or phantom "wealth" conjured into existence by unsustainable credit/asset bubbles. If the Masters of the Economy can't move the needle of real household income for the bottom 95%, they'll end up with a banquet of consequences that extend deep into the social and political orders.

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Monday, July 24, 2017

There Is Only One Empire: Finance

Any nation-state that meets these four requirements is fully exposed to a global loss of faith in its economy, debt, balance of payments and currency.
There's an entire sub-industry in journalism devoted to the idea that China is poised to replace the U.S. as the "global empire" / hegemon. This notion of global empire being something like a baton that gets passed from nation-state to nation-state is seriously misleading, in my view, for this reason:
There is only one global empire: finance. China and the U.S. both exist within the Empire of Finance. Virtually every mercantile nation with access to global markets lives, works and thrives/dies within the Empire of Finance. Every nation that allows capital to flow into its economy is subservient to the Empire of Finance. Every nation with capital and debt markets exposed to (or dependent on) global financial flows is just another fiefdom in the Empire of Finance.
China has thrived within the Empire of Finance by creating more debt and at a faster rate of expansion than any other fiefdom. China has brought 20 years of future growth and income forward, and eventually that vein of "wealth" runs out as time advances into the stripmined future.
The same can be said of all nations that have borrowed heavily from future growth and income to fund consumption/GDP "growth" today.
The Empire of Finance has few requirements for hegemony in its realm, but they are big ones.
1. If you want your national currency to act as a global reserve currency (or the global reserve currency), you must run permanent large trade deficits to export your currency in size to the rest of the world. This is the essence of Triffin's Paradox, which I have covered many times.
2. Your national currency must float freely in the global marketplace and be liquid enough to trade $1 to 2 trillion per day in global foreign exchange (FX) markets.
3. Your sovereign debt/bonds must float freely in the global credit/debt marketplace and be liquid enough to trade in size (tens of billions of dollars) daily.
4. Global capital must be free to flow in and out of your currency, debt, assets and economy without restriction. (Ease of capital flow is the core of liquidity, risk management, and profitability.)
Any nation-state that meets these four requirements is fully exposed to a global loss of faith in its economy, debt, balance of payments and currency.The Empire of Finance is a harsh master; any nation-state that wants to secure the privileges of hegemony must first be willing to accept the risk of full exposure to skittish global markets and capital flows.
Nothing wipes out "wealth" quite as quickly or effectively as a currency meltdown resulting from a sudden loss of faith / risk-averse capital exodus.Such a loss of faith or fear of loss quickly kills a nation's ability to float more debt on the global marketplace.
There's an irony in all this talk of empire: only nation-states that operate within the unforgiving global Empire of Finance can establish hegemony in that Empire, but only nations that become autonomous autarkies (i.e. self-sufficient and independent of global markets, resources, credit, capital, etc.) can thrive outside the global Empire of Finance.
There's only one global empire, that of Finance. If you want global hegemony, you must accept the dominance of global finance and pay tribute. If you don't want to submit to the empire, then you cannot be a global hegemon.
When the Empire of Finance collapses under the weight of its debt, perverse incentives, exploitation and inequality, the financial system of every nation-state within the Empire of Finance will collapse, too. Being the hegemon within the collapsing system won't protect the hegemon from collapse. Every nation-state that has submitted to the Empire of Finance will collapse.
These charts are snapshots of an unsustainable global financial system.
Debt is outracing "growth" everywhere, including China:
To the moon, baby! There's no upper limit on debt--until there is.
There's no limit on the sale of claims on future energy, income and "wealth"--i.e. bonds:
The global economy, by one (flawed) measure (GDP):
As for hegemony and empire--be careful what you wish for. Life outside the financial bubble is much more contingent and risky than life inside the bubble--until it pops.


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Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Sunday, July 23, 2017

In the Footsteps of Rome: Is Renewal Possible?

Once the shared memories of these values are lost, the Empire ceases to exist; there is nothing left to reform or renew.
Is renewal / recovery from systemic decline possible? The history of the Roman Empire is a potentially insightful place to start looking for answers. As long-time readers know, I've been studying both the Western and Eastern (Byzantine) Roman Empires over the past few years.
Both Western and Eastern Roman Empires faced existential crises that very nearly dissolved the empires hundreds of years before their terminal declines.The Western Roman Empire, beset by the overlapping crises of invasion, civil war, plague and economic upheaval, nearly collapsed in the third century C.E. (Christian Era, what was previously A.D.) -- 235 to 284 C.E., fully two hundred years before its final dissolution in the fifth century (circa 476 C.E.).
Meanwhile, the Eastern Roman Empire (Byzantine Empire) faced similar crises in the seventh and eighth centuries, as its capital of Constantinople was besieged by the Persians in 626 C.E. and the Arab caliphate in 674 C.E. and again in 717 C.E. The invasions which preceded the sieges stripped the empire of wealthy territories and the income those lands produced.
In both cases, the Empire not only survived but recovered a substantial measure of its former resilience and stability. Fortune delivered strong leadership at the critical moment: leadership that was able to protect itself from petty, self-aggrandizing domestic rivals, force the reorganization of failed, self-serving bureaucracies, inspire the populace to make the necessary sacrifices for the common good, win decisive military victories that ended the threat of invasion, and generate a moral claim to leadership via personal rectitude and/or participation in a religious revival.
Absent such strong, stable, legitimate leadership, neither empire would have survived their existential crisis.
But strong leadership alone isn't enough. A strong military leader can win battles, and a strong political leader can aggregate power, but these are merely steps to the ultimate goal of strong leadership, which is to reform the Imperial system so it once again serves the needs of the entire Empire rather than just the greed of the few at the top of the wealth-power pyramid.
The system itself must still hold the potential to be reformed. If the systems of communication, trade, control and finance have all eroded beyond the point of no return, then the victories of a strong leader die with that leader.
The army must still have the means to recruit new legions, the Treasury must still have a system to collect tax revenues, the central leadership must have a way to communicate with far-flung commanders and local leaders, and so on.
The collective shared memory of imperial cohesion and competence must still exist in the general populace. Any political group identity, be it tribe, village, nation or empire, is anchored by a shared awareness of membership, i.e. the rights and responsibilities of belonging, and a collective memory of the group / empire as a functioning whole that served the many and not just the few.
Once the shared memory of the Empire as a functioning whole is lost, the entire notion of empire is lost.
The leadership in these existential crises of the third century C.E. in the West and the eighth century in the East could still draw upon a collective memory of a functioning empire. Residents had not yet lost the shared memory of serving in the army, of paying taxes, of stable trade protected by the Empire, of a stable Imperial currency, and so on.
Once the shared memories of these values are lost, the Empire ceases to exist; there is nothing left to reform or renew.
We are far down the road to a system that serves the few at the expense of the many. The collective memory of a system that once served the common good is fading. Strong leadership can still wrest popular political power from the self-serving elites atop the wealth-power pyramid and wield this political power to reform the system so it serves the many instead of just the few, but the window for such reform /renewal is closing fast.
In another decade, a living system that served the common good rather than just the interests of a few will be as distant as the shattered monuments of ancient Rome.


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Thursday, July 20, 2017

When We Can No Longer Tell the Truth...

Lies, half-truths and cover-ups are all manifestations of fatal weakness.
When we can no longer tell the truth because the truth will bring the whole rotten, fragile status quo down in a heap of broken promises and lies, we've reached the perfection of dysfunction.
You know the one essential guideline to "leadership" in a doomed dysfunctional system: when it gets serious, you have to lie. In other words, the status quo's secular goddess is TINA--there is no alternative to lying, because the truth will bring the whole corrupt structure tumbling down.
This core dynamic of dysfunction is scale-invariant, meaning that hiding the truth is the core dynamic in dysfunctional relationships, households, communities, enterprises, cities, corporations, states, alliances, nations and empires: when the truth cannot be told because it threatens the power structure of the status quo, that status quo is doomed.
Lies, half-truths and cover-ups are all manifestations of fatal weakness. What lies, half-truths and cover-ups communicate is: we can no longer fix our real problems, and rather than let this truth out, we must mask it behind lies and phony reassurances.
Truth is power, lies are weakness. All we get now are lies, statistics designed to mislead and phony reassurances that the status quo is stable and permanent. The truth is powerful because it is the core dynamic of solving problems. Lies, gamed statistics and false reassurances are fatal because they doom any sincere efforts to fix what's broken before the system reaches the point of no return.
We are already past the point of no return. The expediency of lies has already doomed us.
Honest accounts of hugely successful corporations that implode share one key trait: in every case, managers were pressured to hide the truth from top management, which then hid the truth from investors and clients.
This is the key dynamic in failed oligarchies as well: if telling the truth gets you sent to Siberia (or worse), then nobody with any instinct for self-preservation will tell the truth.
If obscuring the truth saves one's job, then that's what people do. That this dooms the organization is secondary to immediate self-preservation.
A distorted sense of loyalty to the family, community, company, institution, agency or nation furthers lying as the "solution" to unsavory problems. Daddy a drunk? Hide the bottle. Church a hotbed of adultery and thieving? Maintain the facade of holiness at all costs. Company products are failing? Put some lipstick on the pig. The statistical truth doesn't support the party's happy story? Distort the stats until they "do what's needed." The agency failed to fulfill its prime directive? Blame the managerial failure on a scapegoat.
Pathological liars and cheats rely on self-preservation and misplaced loyalty to mask their own failure and corruption. A hint here, a comment there, and voila, a culture of lying is created and incentivized.
Obscuring the truth is the ultimate short-term expediency.Now that it's serious, we have to lie.We'll start telling the truth later, after everything's stabilized.
But lying insures nothing can ever be truly stabilized, so there will never be a point at which the system is strong enough and stable enough to survive the truth.
We are now an empire of lies. The status quo--politically, socially and economically- depends on lies, half-truths, scapegoats and cover-ups for its very survival. Any truth that escapes the prison of lies endangers the entire rotten edifice.
In an empire of lies, "leaders" say what people want to hear. This wins the support of the masses, who would rather hear false reassurances that require no sacrifices, no difficult trade-offs, no hard choices, no discipline.
The empire of lies is doomed. Lies are weakness, and they prohibit any real solutions. Truth is power, but we can no longer tolerate the truth because it frightens us. Our weakness is systemic and fatal.



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Wednesday, July 19, 2017

The Death Spiral of Financialization

Each new policy destroys another level of prudent fiscal/financial discipline.
The primary driver of our economy--financialization--is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.
Financial "wealth" created by leveraging more debt on a base of real-world collateral that doesn't actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.
As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.
The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.
These extremes don't just pile up like bricks--they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.
This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.
Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to FinancializationEach "fix" that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy's credit-business cycle.
Each new policy destroys another level of prudent fiscal/financial discipline.
The discipline of sound money? Gone.
The discipline of limited leverage? Gone.
The discipline of prudent lending? Gone.
The discipline of mark-to-market discovery of the price of collateral? Gone.
The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.
The discipline of open-market interest rates? Gone.
The discipline of losses being absorbed by those who generated the loans? Gone.
And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation's seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.



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Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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