Stripmining the Middle Class: Neoliberalism Comes Home to Roost

But once this last pool of wealth--America's middle class-- has been siphoned dry, then who's left to stripmine and exploit?

Neoliberalism loves markets, because markets enable the wealthy to own everything that produces income and capital gains. Neoliberalism--the superficially attractive notion that opening local markets to global capital generates prosperity for all involved--is all fun and games when it's stripmining some distant developing-world nation, but since opportunities have dried up globally, the stripmining machine has come home to America and its target is America's middle class.

I have long called this the Neocolonial-Financialization Model: in essence, Neoliberalism is a new, improved version of the old Colonial Model, in which the capital-rich colonial power grabs the political and economic reins via force or subterfuge and proceeds to strip the colonized nation of its wealth and resources and exploits its labor force to manufacture cheap goods for home markets.

In Neocolonialism, the forces of financialization (debt and leverage controlled by central banks and banking cartels) are used to indenture the local populace to the financial center: the peripheral "colonials" borrow money to buy the finished goods sold by the "core" corporations, doubly enriching the center with 1) interest and the transactional "skim" of financializing assets such as real estate, and 2) the profits made selling goods to the debtors.

Essential to the appeal of this colonialist model is the broad-based access to credit: everyone and her sister can suddenly afford to speculate in housing, stocks, commodities, etc., and ride this speculative bubble to a lifestyle that was once the exclusive preserve of the upper class.

Credit-poor colonials are suddenly offered generous credit at modest interest rates. It is an offer that's too good to refuse and the resultant explosion of private credit feeds what appears to be a virtuous cycle of rampant consumption and rapidly rising assets such as equities, land and housing.

But all bubbles pop, and once the asset bubble pops, the credit bubble pops, and all the illusory wealth vanishes, leaving only the debt and the crushing monthly payments. Welcome to the Neocolonial-Financialization Model, neofeudal debt-serfs and tax donkeys!

Having run out of opportunities globally, America's Financial Elite has come home to stripmine the last available pool of wealth: America's middle class. You may have been wondering why America's global corporations have been spending trillions of dollars buying back their own shares.

The answer is two-fold: 1) this reduction in the float (number of shares available for trading) boosts share prices, enriching insiders and super-wealthy owners, and 2) because these global giants can't find any low-risk, high-return opportunities globally to invest in.

The key to stripmining the middle class is simple: once a market has been de-regulated and opened to global capital, the decisive factor becomes the cost of borrowing money, as those with the lowest borrowing costs can outbid everyone else for income producing assets.

Consider a bidding war for a single family home. Nine of the bidders can borrow money (a home mortgage) at around 4% interest, and one can borrow at 1%. This advantage in the cost of capital enables this party to outbid the other bidders because the cost of an additional $50,000 is trivial at 1%.

The bidder with 1% capital also has lower carrying costs, which means they will reap higher profits from rent than the bidders who must pay higher rates of interest.

This is how the Neocolonial-Financialization Model sluices income-producing assets into the hands of the Financial Elite, who have unlimited credit with central banks. The key to the entire Neocolonial-Financialization Model is the central bank, which gives unlimited nearly free money to banks, financiers and corporations, which then lend out this Federal Reserve-supplied nearly free money to debt-serfs at much higher rates of interest.

This is how financiers can buy 20% of all U.S. single family homes in huge gulps, funded by Federal Reserve-supplied nearly free money. This is how the once-middle class ends up "owning" a rapidly depreciating $55,000 truck (via a monstrous loan to a Fed-funded bank or corporation) while the financiers and top tier end up owning virtually all the nation's income-producing assets.

Before you rush to quibble, consider the fact that 97% of all income from capital flows to the top 10%, and the vast majority of this flows to the top 0.1%. The bottom 90%, which by definition includes the middle class, earns a near-zero share of the nation's income from capital.

Monopoly Versus Democracy: How to End a Gilded Age (Foreign Affairs)
"Ten percent of Americans now control 97 percent of all capital income in the country. Nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans."

Europe's Financial Elite led the way, loosing the the Neocolonial-Financialization Model on Greece and other European Union peripheral nations. In essence, the "core" nations of the E.U. colonized the "peripheral" nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the "core" countries exacted enormous profits from this expansion of debt and consumption.

This is the perfection of Neofeudalism. The peripheral nations of the E.U. are effectively neocolonial debtors of the Core countries' banks, and the taxpayers of the Core nations are now feudal serfs whose labor is devoted to making good on any bank loans to the periphery that go bad.

In America, the middle class has been stripped of income-producing assets and saddled with the tax burdens shirked by the billionaires, financiers and global corporations. Having already stripped and exploited America's working class, now an asset-less class of precariats, America's Financial Elite are busy mopping up the last of the middle class's assets.

But once this last pool of wealth--America's middle class-- has been siphoned dry, then who's left to stripmine and exploit? The Federal Reserve has no answer, and neither does anyone else. So here's the answer too frightful to say out loud: just like rats dumped in a sealed 55-gallon drum, America's Financial Elite will have only itself to feed on from now on.

The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)








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While the Herd Slumbers, Risk Is Rocketing Higher

This wholesale transfer of risk from elites to the workers is finally becoming consequential as wealth / income / security inequality is reaching extremes that are destabilizing society and the economy.

One of the most consequential financial trends of the past 50 years has been ignored to the point of invisibility. I'm referring to the transfer of risk from the top tier to the middle and working classes. This transfer of risk has been broad-based, covering the entire economic spectrum:

1. Employment has shifted from secure (low risk of uneven / unpredictable incomes for workers) to insecure / precariat (high risk of uneven / unpredictable incomes). Gig workers are classified as contract workers so they receive no benefits.

2. Healthcare has been shifted to workers / government as corporations game employee hours to avoid paying healthcare; for those with coverage, monthly co-pays paid by workers are soaring as employers shift costs to employees. Healthcare plans have also shifted costs and risks to workers with high deductible plans, i.e. a simulacrum of healthcare insurance.

3. Private-sector pensions have shifted from defined-benefit pensions (costs and risks carried by employers) to 401K matching contributions (costs and risks carried by employees)

4. Federal Reserve policies have destroyed safe yields on savings and money-market accounts, forcing workers to take on the enormous risks of the rigged stock market casino (which is rigged to benefit high-frequency traders, front-running trading houses, and those with asymmetrically distributed information, i.e. insiders).

5. Tax burdens have shifted to the working poor (high Social Security/Medicare taxes), high-income workers (high income taxes), property owners (soaring property taxes) and small business while corporations and billionaires evade taxes with endless loopholes and subsidies.

6. Global corporations have shifted risk to small business via global environmental, regulatory, labor and currency arbitrage. Local governments fall all over themselves to give global corporations tax breaks and generous subsidies while heaping more junk fees and taxes on small business owned by ordinary citizens.

This wholesale transfer of risk from elites to the workers is finally becoming consequential as wealth / income / security inequality is reaching extremes that are destabilizing society and the economy. As Gordon Long and I explain in our new video, The World Just Got a Lot Riskier crony capitalism has transmogrified into predatory capitalism as government, finance and the corporatocracy have allied into a seamless (and seamlessly corrupt) elite class that has offloaded systemic risk onto the unprotected class.

As I often note, risk cannot be extinguished, it can only be transferred. Transferring risk to those least able to bear the consequences is in effect transferring risk to the financial system itself, which is magnifying the risks of a systemic breakdown.

The herd is slumbering, anesthetized by the narcotic of the Federal Reserve's infinite moral hazard. Once risk can no longer be suppressed, the herd will awaken and quicken into a stampede in which every individual will thunder off the cliff to catastrophic losses absolutely confident that the Fed has my back. So sorry, but the Fed only protects banking cronies, predatory capitalists, billionaires, front-running financiers and global corporations.

Gordon and I discuss these heightened risks in The World Just Got a Lot Riskier (36 minutes).








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What's Behind the Inflation Hall of Mirrors?

The global economy may have finally run up against hard limits of "infinite substitution" and "infinite expansion" funded by central-bank free money.

We are in an interesting Hall of Mirrors moment: prices are rising, yet we're assured by the Federal Reserve that this inflation is "transitory," and other voices are insisting the primary forces of the economy (globalization, debt and automation) are all profoundly deflationary, meaning prices of everything will eventually plummet as supply will outstrip demand. At this same moment, others are declaring the start of a new secular inflation that cannot be controlled with Federal Reserve interest-rate manipulation / bond-buying.

What do you see in the kaleidoscope of reflected images? Here's a few things I've seen in the Inflation Hall of Mirrors:

-- A package of three rib-eye steaks in Costco for $65

-- a Ford dealership with no new Fords on the lot and a scattering of used cars

-- A Nissan dealership with no Versas, Ultimas, Leafs, etc.

-- used cars with 140,000 miles carrying nosebleed asking prices

-- a basic breakfast in a restaurant for over $20

-- resorts charging $450/day, with surcharges and taxes on top

-- utility fees rising 10% to 20% annually

One can argue all of these are examples of temporary inflation generated by an imbalance of limited supply and high demand. Perhaps. But it may also be the case that the costs of production have increased in ways that are not temporary.

Consider wages. Once wages go up and benefit costs go up, they do not come down. Very few people will accept a pay cut as prices soar.

Consider coffee. Demand for coffee is typically stable. If prices rise 30%, most coffee drinkers will not switch to tea. They will pay the higher price. The three-pound tin at Costco for $10.99 may well go to $15.99, but the $5 extra will not induce most coffee drinkers to switch to some other beverage.

As frost and drought reduce the global coffee supply, what exactly is "transitory" about lost harvests and damaged trees? It takes many years to get a substantial yield off a coffee tree, and the harvesting process is labor-intensive. If labor isn't available, the crop rots.

Scarcity hasn't been a factor in decades. Globalization has institutionalized the idea that there is always "more" of everything available somewhere: more lithium, more cheap labor, more oil, more coffee, more wild fisheries, more fresh-water aquifers to tap, and so on. The possibility that "more" has morphed to "less" simply doesn't compute in an economy based on the secular divinity of infinite substitution: there is always a cheaper substitute somewhere in the world that can be tapped and funneled into the global supply chain.

So what happens when there are no cheaper sources, and no substitutes? In the secular religion of infinite substitution, this is "impossible," hence non-transitory inflation is "impossible." But perhaps this secular faith is no longer aligned with the real world.

Intensive Care Units (ICU) offer an insightful analogy. ICUs are a concentration of specially trained talent which can only be acquired through long years of experience. In the In the secular religion of infinite substitution, it's an article of faith that there is a pool of specialists that can be tapped if we just print enough money to buy them.

But printing money can't create a pool of specialized talent. This process is experiential and cannot be purchased off the shelf or ramped up with Fed stimulus. There is no pool of ICU experience in Lower Slobovia waiting to be tapped with Fed free money.

Fed free money might fund the construction of a new ICU ward and fill it with expensive equipment--itself a lengthy, multi-year process--but if there's no staff with the requisite experience, the new ward will fail to fill the scarcity as intended.

It's also possible that the existing pool of specialized talent might actually shrink as the imbalance of supply and demand burns out overworked staff.

In other words, the global economy may have finally run up against hard limits of infinite substitution and infinite expansion funded by central-bank free money. In the temples of this secular faith, accelerating, permanent inflation is "impossible."

All sorts of things that are viewed as "impossible" happen with remarkable regularity. What's behind the Inflation Hall of Mirrors may surprise true believers in "transitory inflation" and global deflationary forces.




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Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

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Why Don't Billionaires Pay the Same High Tax Rates the Rest of Us Pay?

The truth is America has lost its way if commoners pay a rate of 40% but its billionaires pay next to nothing.

As with everything else in polarized America, billionaires proclaiming space tourism is the next big thing for humanity neatly divides opinion into two camps: those who laud the initiative, hard work and innovations of the billionaires as examples of the American Can-Do Dream, and those who wished the billionaire space tourists had taken a one-way flight to a distant orbit of blissful silence.

Setting aside that bitter divide, let's explore another divide: how our two-tier tax system enables billionaires to become billionaires while the rest of us get poorer. Whenever I discuss the taxes of the non-billionaire self-employed, armies of apologists leap to the defense of the status quo with various quibbles: the 0.9% Medicare surcharge only kicks in above $200,000, the cap on Social Security taxes is $142,800, and so on.

Setting aside the quibbles--and recall the tax code with regulatory notes is thousands of pages--let's deal with the real issue, which is that billionaires and their corporations pay a thin slice of taxes as a percentage of total income/gains if they pay any at all, while self-employed and small business pay extraordinarily high tax rates.

To all the quibblers: please add the 15.3% Social Security/Medicare tax rate (self-employed / sole proprietors pay both the employee and employer share of this tax) to the federal tax rate of 24% for income above $85,520. It's 39.3%.

Just how hard would it be to conclude that everyone earning more than $142,000 should pay at least the same rate the rest of us pay? Aren't we demonstrating all those same laudable traits of the billionaires, just on a smaller scale? Why should we pay 40% and the billionaires pay essentially zero?

Gee, do you reckon paying no taxes might help folks become richer? Garsh, nobody ever asked that question before. And do you reckon paying 40% of your income might make you poorer over time? Golly gee, how come the talking heads worshiping the billionaires never ask these questions?

Since Social Security and Medicare/Medicaid are the bedrock of America's social safety net, why shouldn't billionaires pay to support these programs? Well, why not? Just how lame do the excuses have to be to be recognized as laughably self-serving?

Here's the trick billionaires use to evade taxes. There are countless ways for the super-wealthy to evade taxes--funnel earnings through an Irish post office box, buy a tax break in Washington DC, slide the money into one of dozens of global tax havens, and so on.

But a simple one is to report no income and live large off borrowed money. As the billions of dollars in capital gains pile up as the billionaire's stock holdings soar (thanks, Federal Reserve, for the free trillions; awful swell of you to give us all that free money), there's no income generated until the billionaire sells some shares. No sale, no income. Just pay yourself $1 a year in salary, borrow against your billions at super-low rates of interest, and voila, you're tax-free while you build your super-yacht, buy your private island, and so on.

Just as a thought experiment, suppose the first $50,000 in earnings for everyone were tax-free, and a 40% tax rate was collected on all income above $1 million, both earned and unearned (capital gains), not when the gains were realized in a sale but at the end of every tax year, whether the shares that rose in value were sold or not.

So Billionaire Space Tourist reaped $10 billion in capital gains from the appreciation of stocks held, then the Billionaire pays 40% of those gains: $4 billion. There is a way to not pay any taxes on capital gains--have your portfolio lose value. No gains, no taxes. And to close all the loopholes, the tax rate is on all assets and income connected in any way, shape or form with the U.S. First they pay the U.S. taxes, then if they want to pay other nations' taxes as well, be my guest. But the 40% is due and payable regardless of any other conditions.

You don't like it, then stop selling any products in the U.S. or holding any assets in the U.S. Why should billionaires get to set up immensely profitable monopolies, quasi-monopolies, cartels and corporations in the U.S. but pay near-zero in taxes? Why should billionaires be free to profit from America's economy but pay nothing to support its citizenry?

What precisely is the logic of reducing taxes on the wealthiest few to near-zero? If there is no logic, then we're left with corruption: America is a moral cesspool.

The truth is America has lost its way if commoners pay a rate of 40% but its billionaires pay next to nothing. Please note Karma and Divine Retribution are not controlled by the billionaire's lackeys and apparatchiks in the Federal Reserve. The pendulum of exploitation has reached its extreme, and the reversal to the opposite extreme is underway.




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Recent Videos/Podcasts:

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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

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The Moment Wall Street Has Been Waiting For: Retail Is All In

The ideal bagholder is one who adds more on every downturn (buy the dip) and who refuses to sell (diamond hands), holding on for the inevitable Fed-fueled rally to new highs.

Old hands on Wall Street have been wary of being bearish for one reason, and no, it's not the Federal Reserve: the old hands have been waiting for retail--the individual investor-- to go all-in stocks. After 13 long years, this moment has finally arrived: retail is all in.

If you doubt this, just look at record highs in investor sentiment, margin debt and the Buffett Indicator (see chart below). Current valuations are so extreme that the previous extreme in the 2000 dot-com bubble now looks modest in comparison.

I have my own sure-fire indicators for when retail is all-in. One is my Mom's financial advisor recommends shifting her modest nest-egg out of safe bonds into the go-go stocks that are topping out. Back in late 1999, it was Cisco Systems and the other dot-com leaders, today it's the FANGMAN stocks. Sure enough, my Mom just informed me her advisor recommended moving money from bonds into a FANG-dominated stock fund. Bingo, we have a winner.

Second indicator: average people who have never traded stocks are all-in and supremely confident they can't lose. When 20-year college students are trading based on a "genius" 22-year old friend's advice, retail is all-in. When a worker cleaning a wooden deck pauses to put $100,000 in a company he knows nothing about (yes, true story), retail is all-in.

Much is made of meme stocks, but the real driver of retail going all-in is the complete collapse of risk / moral hazard: the Fed will never let the market go down is not a meme, it is an article of secular faith, supported by 13 long years of ceaseless Fed intervention / stimulus, all in service of elevating the stock market.

Since all evidence supports this secular religion--stocks never go down because the Fed will never let them go down--the trick is to rotate into the next blow-out winner or buy the dip in Big Tech or a meme stock. And since something is always shooting up like a rocket, the way to become a millionaire is to simply buy what's hot and buy the dip.

In this secular religion, nothing else matters, all the old stuff is just a distraction: price-earnings ratios, valuation, cash flow, future earnings--none of that old stuff matters. Technical analysis is also a waste of time: just buy the dip and rotate into what's hot, and the millions just pile up on their own.

Every generation that experiences a speculative mania feels it's unique. This is the pattern that repeats. The confluence of forces driving the mania to unprecedented heights is so obviously unique and uniquely powerful that it is literally crazy not to grab a board and ride the wave to riches.

What the newly minted millionaires don't understand is they're the marks and bagholders. Wall Street has been patiently waiting for retail to go all-in so the pros can sell all the over-valued stocks to the euphoric, trusting retail traders, who will continue to buy the dip and rotate into the next hot meme-stock until their fortunes have dwindled to spare change.

The con requires euphoric confidence that stocks only go up forever, and every retail trader is confident in their ability to ride the wave to riches. We're finally at that summit of euphoric confidence, where faith in the Federal Reserve is literally a religious experience.

Robbing Hoods going public is a scriptwriter's touch. (Forgive me if I got the name wrong, I'm working from memory.) Stocks never go down is absolutely true, take it to the bank, until they do. Every share of stock ends up in somebody's account, and the ideal bagholder is one who adds more on every downturn (buy the dip) and who refuses to sell (diamond hands), holding on for the inevitable Fed-fueled rally to new highs.

That's how accounts are destroyed, and the wreckage isn't just financial. The scars of being a bagholder can last a long time. But Wall Street is patient, and a new crop of bagholders eventually catches Fed Fever, and the transfer of over-valued equities to a new generation of bagholders will play out according to the same script.




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.

My new book is available! A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet 20% and 15% discounts (Kindle $7, print $17, audiobook now available $17.46)

Read excerpts of the book for free (PDF).

The Story Behind the Book and the Introduction.


Recent Videos/Podcasts:

AoE Salon #44: We say "Satyagraha", they say "sedition" with author Max Borders (1:03 hrs)

My COVID-19 Pandemic Posts


My recent books:

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

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


Become a $1/month patron of my work via patreon.com.

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Read more...