Wednesday, March 25, 2020

The Pandemic Is Accelerating the Breakdown That Began a Decade Ago

The feedback loop has reversed: by saving more, people will spend, borrow and speculate less, draining the fuel from any broadbased expansion.
In eras of confidence and certainty, people save less and spend more freely. When we're confident that good times are not only here but will continue, we not only spend more freely, we're more inclined to borrow money and speculate on the shimmering promises of more good times ahead.
In eras of uncertainty, people save more and spend, borrow and speculate less. There is an obvious feedback loop here: if people feel confident about their future prospects and have a measure of certainty about the general economic trend, they spend more, borrow more and speculate more, all of which feed the expansive mood that then encourages further spending, borrowing and speculating.
If their confidence collapses and the future is deeply uncertain, people save more as a hedge against bad things happening in the economy that could trigger hardships in their own household.
With this in mind, it's interesting to look at a long-term chart of the U.S. savings rate, courtesy of the St. Louis Federal Reserve database (FRED). It's easy to discern the waxing and waning of confidence / certainty in the decline or expansion of savings.
The broadbased prosperity of the 1960s is reflected in the high savings rate as cheap oil and real-world growth (as opposed to financial trickery and speculation) fattened paychecks while real-world inflation (cost of living) remained low.
The uncertainties of stagflation--oil shocks, recessions and soaring inflation and interest rates-- pushed savings higher in the early 1970s. As purchasing power and speculative gains fell, so did the savings rate as households struggled to keep up with soaring costs of living.
Once inflation and speculative excess were wrung out, the stage was set for a 25-year expansion of "good times" powered by the financialization of the entire economy, the rise of high tech and the first stages of de-industrialization and offshoring, a.k.a. globalization.
Note that the savings rate popped higher after the 1991 oil-shock / Desert Storm recession and again after the dot-com bubble burst in 2000-02.
But the trend to save less and spend/speculate more continued until the the housing bubble burst, triggering the Global Financial Meltdown of 2008-09. When the dot-com bubble burst, the effects were largely confined to the tech sector and those who had speculated in the frenzy. But the housing bubble bursting had far wider consequences, as housing is the bedrock of household wealth and mortgages are the largest category of household debt.
The primary trick of financialization is to turn previously low-risk assets such as home mortgages into high-risk financial instruments that can be traded globally as "low-risk" assets. This fiction--greased by rampant fraud and institutionalized misrepresentation of risk--nearly brought down the global financial system when it finally unraveled.
This globalization of financialization went hand in glove with the rapid expansion of offshoring and the hollowing out of real-world economies as the purchasing power of labor (wages) stagnated for all but the top tiers (top 5% and to a lesser degree, the top 10%) of technocrats, managers and entrepreneurs who rode the wave of globalization and technology.
To save the financial system from a well-earned collapse, central banks pushed monetary policies to unprecedented extremes, lowering interest rates and flooding the system with liquidity / stimulus. These extraordinary monetary policies boosted assets while leaving the real-world economy in decline as globalization stripmined local economies that could not compete with global corporations feasting on low interest rates, a steady decline in quality and quantity designed to increase profits and cheap overseas labor.
Despite the thin gloss of "growth" this hyper-financialization generated, the stagnation of wages and real-world economy are reflected in the savings rate which has been steadily rising since 2009. The erosion of the real-world economy and the purchasing power of wages has sapped confidence in future prospects and ushered in an era of rising uncertainty.
The economic-financial fallout from the Covid-19 pandemic is accelerating the loss of confidence and the rise of uncertainty that has been trending higher for over a decade.
The feedback loop has reversed: by saving more, people will spend, borrow and speculate less, draining the fuel from any broadbased expansion. This is one reason why monetary policy extremes won't revive growth, real or fictitious: the uncertainty that was launched in 2009 is only deepening.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Monday, March 23, 2020

Helicopter Money: Short-Term Relief Won't Cure our Financial Disease

The collateral supporting the global mountain of debt is crumbling as speculative bubbles deflate.
A great many freebies are being tossed in the Helicopter Money basket. That households experiencing declines in income need immediate support is obvious, as is the need to throw credit lifelines to small businesses. But beyond those essentials, the open-ended nature of Helicopter Money has unleashed a frenzy of political favors and giveaways that have little to do with helping households and everything to do with rewarding favored cronies, cartels and interest groups.
As Gordon Long and I explain, the short-term "pain relief" of Helicopter Money won't cure the economy's financial disease; rather, it will act as a catalyst for longer-term disruption and decline.
None of the giveaways being discussed address the core causes of our systemic financial disease:
-- Erosion of real-world collateral supporting the ever-growing mountains of debt and leverage
-- Diminishing returns on monetary stimulus (Federal Reserve financial cocaine no longer generates euphoria)
-- Domino-like disruption of global supply chains and global demand
-- Stagnating purchasing power of labor
-- The use of debt to keep up with the soaring costs of essentials (rent, healthcare. childcare) and aspirational goods (iPhones) and services (vacations)
-- Repricing of risk and risk assets
The stability of the entire system is increasingly fragile and brittle. The abuse of money-printing--creating currency to benefit bloated, inefficient, parasitic, predatory institutions, cartels and monopolies--is further eroding already-decaying confidence in monetary and fiscal authorities and policies.
The collateral supporting the global mountain of debt is crumbling as speculative bubbles deflate. What happens to margin debt when the $300 stock falls to $100? What happens to the $1 million mortgage when the decaying bungalow's value falls from $1.2 million to $400,000?
The inevitable result of creating currency is excess of the creation of goods and services is a decline in purchasing power which we experience as inflation / shrinkflation (getting lower quality and less quantity even though the price has remained the same).
This loss of putchasing power has been masked by bogus statistical tricks and shrinkflation, but as the Helicopter Money trillions flood through the economy and global supply chain disruptions cause prices to rise, the usual bag of tricks will no longer be enough to hide the higher costs and declining purchasing power.
Then there's the psychological impact of the reverse wealth effect as households and enterprises see their net worth and income dropping. The confident euphoria required to borrow and spend freely has evaporated and will not be returning, regardless of how much currency is created and distributed.
Gordon and I discuss these topics in this 37-minute video:
If you missed our three-part series:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Saturday, March 21, 2020

The System Will Not Return to "Normal," and That's Good; We Can Do Better

Essential home lockdown reading.
The pandemic is revealing to all what many of us have known for a long time: the status quo was designed to fail and so its failure was not just predictable but inevitable.
We've propped up a dysfunctional, wasteful and unsustainable system by pouring trillions of dollars in borrowed money down a multitude of ratholes to avoid a reckoning and a re-set. And very predictably, that's the "solution" to the unraveling triggered by the pandemic: borrow more trillions and pour most of it down the same old ratholes.
Here's what we should be talking about: the entire global system desperately needs a re-set. We can do better, and we should do better. That's what I've been writing about for the past 12 years.
To further the discussions we should be having about doing betterI'm cutting 30% off the price of seven of my books: ebooks are now $5, print books are now $10.
Every book has a free summary/sample page where you can find out more about the contents.
What better way to spend the weeks/months of lockdown than reading about the better future we need and deserve? To buy a book, click on the cover below:
The Nearly Free University and The Emerging Economy: The Revolution in Higher Education Reconnecting higher education, livelihoods and the real economy
This book outlines ways we can provide a superior college education for 10%-20% of the current (unaffordable) cost.
Our financial-political-social system has been rotten to the core for two decades. It doesn't have to be this way.
The credo of liberation:
"I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests."
Written 9 years ago, the precepts of social capital and controlling your capital are even more relevant today.
We desperately need a profound re-set on the way we work, pay for work and prioritize what work gets done.
Our political system and the economy it controls both need to be decentralized and relocalized.
The promise of technology has been harnessed to widen the immense gaps in wealth and power between the super-rich and the rest of us. It doesn't have to be this way: AI and technology could restore some balance to an ecologically endangered world if we change the predatory economic-political power structure.
If you want a dash of escapist fiction, you might like The Adventures of the Consulting Philosopher.
To buy a book, click on the cover:
           
           
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.

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Wednesday, March 18, 2020

The Global Repricing of Assets Can't Be Stopped

All bubbles pop, period.
The financial elites are pushing a narrative that asset prices, sales and profits will all return to January 2020 levels as soon as the Covid-19 pandemic fades. Get real, baby. Nothing is going back to January 2020 levels. Rather than the "V-shaped recovery" expected by Goldman Sachs et al., the crash in asset prices will eventually gather momentum.
Why? It's simple: for 20 years we've over-invested in speculative bubbles and squandered borrowed money on consumption and under-invested in productivity-increasing assets. To understand why the market value of assets will relentlessly reprice lower--a process sure to be interrupted with manic rallies and false dawns of hope that a return to speculative good times is just around the corner--let's start with the basics: the only sustainable way to increase broad-based wealth is to boost productivity across the entire economy.
That means producing more goods and services with less capital, less labor and fewer inputs such as energy.
Rather than boost productivity, we've lowered productivity via mal-investment and by propping up unproductive sectors with immense sums of borrowed money--money that accrues interest.
The poster child for this dynamic is higher education: rather than being pushed to innovate as costs skyrocketed, the higher education cartel passed its inefficiencies and bloated cost structure onto students, who have paid for the bloat with $1. 6 trillion in student loans few can afford. (See chart below.)
As for Corporate America squandering $4.5 trillion on stock buybacks (Wolf Richter)-- the effective gains on productivity from this stupendous sum is not just zero--it's negative, as the resulting speculative bubble suckered in institutions and individuals who'd been stripped of safe returns by the Federal Reserve's low-interest-rates-forever policy.
What could that $4.5 trillion have purchased in terms of increasing the productivity of the entire economy? Considerably more than the zero productivity generated by stock buybacks.
The net result of uneven gains in productivity and the asymmetric distribution of whatever gains have been made is stagnant wages for the bottom 90% and rising costs for everyone. Those of us who are self-employed or owners of small businesses know that healthcare insurance costs have been ratcheting higher by 10% or more annually for years.
Whatever gains in health that have been purchased with the additional trillions of dollars poured into the healthcare cartels have been offset with declining life spans, soaring addictions to opioids and numerous broad-based declines in overall health.
The widespread addiction to smartphones and social media have deranged and distracted millions, crushing productivity while greatly increasing loneliness, insecurity and a host of social ills.
Two dynamics define the economy in the 21st century:
1. We have substituted debt-driven speculation for productive investment
2. We have substituted debt for earnings
This is why the repricing of speculative-bubble assets can't be stopped: debt-driven speculation is not a sustainable substitute for investing in increasing productivity, and debt-fueled consumption masquerading as "investment" is not a sustainable substitute for limiting consumption to what we earn and save.
All bubbles pop, period. Once Corporate America's credit lines are pulled and its revenues and profits plummet, the financial manipulation of stock buybacks will end. That spells the end of the 12-year bull market in stocks.
As the tide of speculative mania ebbs and confidence wanes, the world's housing bubbles will all pop, and the $1.4 million bungalows will drift back down to their Bubble #1 highs around $400,000, and perhaps even drop from there.
As for collectibles and other play-things of the super-wealthy: the bids will soon vanish and yachts will be set adrift to avoid paying the dock fees.
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.

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Thank you, Clifton C. ($50), for your wondrously generous contribution to this site -- I am greatly honored by your support and readership.
 
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