Friday, November 08, 2019

No Recession Ever Again? The Yellowstone Analogy

Just as forestry management's policy of suppressing forest fires insured uncontrollable conflagrations, so central banks' attempts to eliminate recessions insure a financial conflagration that will burn down the entire global financial system.
The first task of those at the levers of neoliberal global capitalism is to deny that global capitalism is in crisis. One manifestation of this is the no recession ever again policy that is the implicit goal of central banks and governments globally.
Any hint of global slowdown draws an immediate and overwhelming deluge of credit and currency as central banks slash interest rates, buy bonds and stocks to push markets higher and unleash a tsunami of fresh credit so corporations can buy back billions of dollars of their own shares and consumers can continue to buy vehicles, houses and other goodies.
Neoliberal global capitalism has one unstated law: credit must always expand or the system dies. The rate of credit expansion can increase or decrease but it must continue expanding forever.
This is the foundation of the no recession ever again policy: as long as governments, consumers and corporations continue to borrow more, nothing else matters.
But as the Yellowstone Analogy illustrates, something else does matter: the financial dead wood of mal-investment, bad debt and excessive speculation is piling up, creating the ideal conditions for a financial conflagration that will consume the entire system.
Let's start with neoliberal global capitalism.
Neoliberal global capitalism has two elements: one is the ideological quasi-religion that everyone prospers when everything is turned into a global marketplace of freely flowing capital, labor and buyers-sellers.
The second element is the model of State-managed capitalism which has been in vogue since the Great Depression and the Keynesian revolution: when capitalism's business cycle veers into recession (unemployment, slowing sales and borrowing, etc.) then the government suppresses recession with monetary policy (quantitative easing and injections of liquidity) and fiscal policy (debt-funded stimulus programs, etc.)
Sounds good, but the Yellowstone Analogy reveals the fatal flaw in this recession-suppression strategy. "Free market private sector capitalism's" normal business cycle of over-investment and excessive risk-taking is naturally followed by a reduction in debt, the liquidation of bad loans and excess inventory, a trend to reduced risk, etc.--in other words, a fast-burning forest fire which incinerates all the dead wood, clearing space for the next generation of growth.
For decades, the operative theory of forestry management was that limited controlled burns-- mild reductions of dead underbrush and debris--would essentially reduce the possibility of a major fire to near-zero.
But the practice actually allowed a buildup of dead wood which then fueled the devastating forest fire which swept Yellowstone National Park in 1988. Recessions are like low-level naturally occurring forest fires that cleanse the system of the dead wood of bad debt, mal-investment and excessive speculation.
The global financial system has been busy piling up dead wood since the brief fire in 2008-09 threatened to burn down the entire system. All the derivatives originated and sold prior to 2009 were supposed to, along with "self-regulating markets" (heh), limit the risks in the financial systems to near-zero.
In other words, even as dead branches piled ever higher, various complex hedges would insure no fire in global financial system would ever spread.
Meanwhile, the Federal Reserve made sure the slightest whiff of debt reduction or other signs of recession were instantly snuffed with unprecedented low interest rates and abundant government stimulus.
But this private and public risk suppression not only failed to eradicate risk--it enabled risk to grow to unprecedented levels.
The recession-suppression technique being pursued by governments everywhere are simple: borrow and print staggering sums of money to bail out the private-sector banks which sparked the crisis, and then borrow and print even more money and throw it into the economy as monetary and fiscal stimulus.
Unfortunately, all this credit-stimulus is adding more dead wood to an already vast pile which is choking what's left of the economy's living forest. Rather than close down failed banks and businesses, various games are being played to negate the fires of creative destruction which real capitalism needs to thrive; without a write-off of bad debts and risky failed gambles and a closure of overcapacity then the new business cycle cannot take root.
Instead of letting the dead wood burn, the system props up zombie corporations and banks that would be destroyed if credit wasn't "free." The zombie banks and businesses--the equivalent of dead but still-standing trees--are the perfect tinder for a fast-spreading conflagration that burns everything to cinders.
Isn't it obvious that by trying to make forest fires a thing of the past then you're actually killing the forest? The same mechanism is at work in the multi-trillion dollar attempts to make financial cycles of over-indebtedness and excessive risk a thing of the past: the no recession ever again policy.
You can't make people and enterprises with little real collateral creditworthy. To shove more debt into the system is to pile more dead wood onto the already-dense pile of dry debris awaiting a lightning strike.
The big conceit here is that borrowing trillions of dollars is risk-free as long as the government is doing the borrowing. That is an illusion: there is always risk when you borrow or print or backstop/guarantee trillions of dollars of risky debt; the risk has simply been transferred to taxpayers, who will soon suffer the consequences.
For the crisis in capitalism is not just debt-based--it's also resource and demographic-based. Back when the Social Security system was designed, it was assumed there would always be 10 workers to "pay as you go" to support 1 retiree. The Baby Boom in the 1950s made that projection reassuringly long-term--or so it seemed.
Now that we're approaching a worker-retiree ratio of 2.5-to-1, the system cannot possibly pay the benefits promised without borrowing trillions of dollars each and every year--and from whom?
Neoliberal capitalism is in crisis for one fundamental reason: the central bank and state have played "the fixer" with monetary and fiscal policy in the belief that risk could be suppressed or even massaged away by spreading it over the entire system.
But the excesses of credit, risk, bubbles and overcapacity are now gutting the very middle class which the State relies on to pay most of the taxes. And as tax revenues stagnate, the State and the "private sector capitalism" which depended on passing off its risks and gambles-gone-awry to the State will find the firestorm was not suppressed-- the dead wood was only piled higher, so the only possible outcome is an uncontrollable conflagration that consumes the entire neoliberal global system.
The no recession ever again policy is exactly like suppressing forest fires: just as suppressing naturally occurring fires that keep the forest healthy insures a raging conflagration that burns down the entire forest, so too does the no recession ever again policy insure an uncontrollable financial conflagration.
Shouting that "we owe it to ourselves" will not stop the conflagration, and neither will any other form of magical thinking.



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


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Monday, November 04, 2019

The Middle Class Is Now The Muddle Class

The net result is the muddle class has the signifiers but not the wealth, power, capital or agency that once defined the middle class.
The first use of the phrase The Muddle Class appears to be The rise of the muddle classes (Becky Pugh, telegraph.co.uk) in January 2007. The "muddle" described the complex nature of defining "the middle class," which includes education, class origins, accents, and many other financial, social and cultural signifiers.
Comedian Jason Manford claimed to have coined the term in June 2013"I've invented a new term; 'Muddle Class'. When you find yourself being working class AND middle class at the same time."
I'm using the term to describe the economic class that has the social signifiers of middle class status but little to no ownership of meaningful capital or control of their own financial security. In other words, this class "muddles through" the erosion of their purchasing power and economic security, claiming the social status of "middle class" while their financial status is impoverished when compared to the security of previous generations of "middle class."
Social status signifiers include: college diplomas, advanced degrees, overseas travel, aspirational dining and consumer goods, home ownership, etc. But where previous generations were building meaningful capital and assets that could be passed down to their offspring, the assets of the "muddle class" are either negligible or highly contingent on the speculative bubble du jour (stocks, bonds, housing).
The more meaningful economic metrics for middle class status are:
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.
If debt overwhelms assets, this financial fragility is not "middle class."
3. The ability of the household to set aside substantial savings / capital investment.
If the household is unable to save enough to weather financial crises, this financial fragility is not "middle class."
4. The security of the households' employment.
5. The dependence of the household wealth on speculative asset bubbles inflated by central bank policies.
If owner's net equity in a house is 10% to 20% of the value (the rest being mortgage debt), a modest deflation of the housing bubble will wipe out all their equity and leave them underwater, i.e. owing more than the house is worth. This financial fragility is not "middle class."
6. The percentage of the household income that is unearned, i.e. derived not from labor but from productive assets.
If all the household income is earned and there is no accumulation of income from capital (assets), then this is the definition of the working class.
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.
Households that depend on government transfers to get by are not "middle class."
The muddle class is losing ground not just in financial security and agency (control of capital), but in intangible capital, a topic I explore in my new book Will You Be Richer or Poorer? Profit, Power and A.I. in a Traumatized World: the intangible capital of social mobility, positive social roles, employment stability, political power and a host of other forms of capital that define "middle class" as much as a college diploma or home ownership.
The middle class has been transformed into the muddle class by a number of forces:
1. Neoliberal globalization and ideology has eroded employment security by offloading risk onto workers while fragmenting the family structure via turning everything into a global market.
2. The 4th Industrial Revolution (software, robotics, digital technologies) is disrupting previously stable employment, making earned income contingent and prone to disruption.
3. The destruction of interest earned on savings and the rise of central-bank fueled speculation has forced households to either lose ground by holding cash or gamble in the rigged casino of global markets--a gamble most will lose by design.
4. The ceaseless rise of non-discretionary costs has eroded the purchasing power of wages, while the winner take most speculative economy has reduced labor's share of the economy (see chart below).
The net result is the muddle class has the signifiers but not the wealth, power, capital or agency that once defined the middle class. Signifiers may have social value, but not the sort of financial value that can be handed down or converted into tangible capital.



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, Dan F. ($50), for your superbly generous contribution to this site-- I am greatly honored by your steadfast support and readership.
 

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Saturday, November 02, 2019

Chumps: China Is Playing Trump and His Trade Team

If we put ourselves in the shoes of the Chinese negotiators, we realize there's no need to sign a deal at all.
The world's worst negotiating strategy is to give the other side everything they want in exchange for worthless empty promises, yet this is exactly what Trump and his trade team are doing. All the Chinese trade team has to do to get rid of tariffs and other U.S. bargaining chips is mutter some empty phrase about "agreeing in principle" and the U.S. surrenders all its bargaining chips.
If the other side are such naive chumps that they give you everything you want without actually committing to anything remotely consequential, why bother with a formal agreement? Just play the other side for the chumps they are: if they threaten to reinstate tariffs, just issue another worthless press release about "progress has been made."
The other guaranteed losing strategy in negotiation is advertise your own fatal weakness, which in Trump's case is his obsession with pushing the U.S. stock market to new highs. There is no greater gift he could hand the Chinese trade team than this monumental weakness, for all they have to do is talk tough and the U.S. stock market promptly tanks, sending the Trump Team into a panic of appeasement and empty claims of "progress."
The Chinese team has gotten their way for a year by playing Trump's team as chumps and patsies, so why stop now? The Chinese know they can get way without giving anything away by continuing to play the American patsies and using the president's obsession with keeping U.S. stocks lofting higher to their advantage: declare the talks stalled, U.S. stocks crater, the American team panics and rushes to remove anything that might have enforcement teeth, reducing any "trade deal" to nothing but empty promises.
Given their success at playing America's team, why do a deal at all? Just play the chumps for another year, and maybe Trump will be gone and a new set of even more naive patsies enter the White House.
If we put ourselves in the shoes of the Chinese negotiators, we realize there's no need to sign a deal at all: the Trump team has gone out of its way to make it needless for China to agree to anything remotely enforceable. All the Chinese have to do is issue some stern talk that crushes U.S. stocks and the Trump Team scurries back, desperate to appease so another rumor of a "trade deal" can be issued to send U.S. stocks higher.
It would be pathetic if it wasn't so foolish and consequential.



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.
 
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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 AnymoreOur 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).


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, Betty W. ($50), for your superlatively generous contribution to this site-- I am greatly honored by your support and readership.
 

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