Wednesday, February 29, 2012

Eye-Witness History of Occupy Wall Street Movement Now Available

A fascinating account of the 99%/Occupy Wall Street movement by one of the original organizers is now available.

I have been a supporter of the Occupy Wall Street (OWS) Movement even before it acquired that name. Back in June 2011, David DeGraw and other organizers first issued a call to action: occupy a site near Wall Street on Flag Day, June 14, 2011. Here are my entries in support:
The Necessity of Resisting Financial Tyranny (June 11, 2011)
Our Participation Fuels Financial Tyranny (June 13, 2011)

That first occupation effort fizzled, but as other organizers and organizations joined the movement, the next occupation exploded onto the world stage in September 2011. In October, I wrote a brief commentary entitled Semi-Random Notes on the Occupy Wall Street (OWS) Movement (October 20, 2011)

David has just issued a book of the original essays that helped launch the 99% movement and a recap of the OWS movement's evolution and history: The Economic Elite Vs. The People of the United States of America. The book is exclusively available by donating $20 to via Amazon (click on the image to access the Amazon link) orPayPal.

In my June 2011 essays, I suggested those of us who were not physically present for the occupation could actively resist financial tyranny by removing our own money from Too Big To Fail banks and Wall Street corporations. Now there is another action you can take from the privacy and safety of your own home: donate $20 to and help support David's multi-year effort to end the predatory, democracy-destroying reign of Wall Street's financial Elites.

Many applaud the effort, few support it with actual cash or action. Here is how David summarized this reality:
I have had many encouraging conversations with very wealthy individuals and people who run large organizations that say that they want to support the movement and help it grow. Many people well within the economic top 1% fully understand that our political process is overrun with corruption and that we are on a critically unsustainable path. They view the 99% Movement and Occupy as our last best chance to turn things around. There are many people within the 1% who do not want to be associated with the "organized criminal class," which technically only makes up 0.1% of the population, at most. I have a great deal of respect for these compassionate and conscious one percenters. 
However, as of this writing, financial and resource support has been minimal. Every day I speak with organizers and occupiers throughout the country who have played a very significant role in building this movement and they can no longer afford to keep fighting fulltime. Just like everyone else, they have bills to pay and families to feed. Other than financially, the past five months have taken a serious physical toll on many of us. Many people have lost considerable weight, have had a nasty cold and cough, and have been getting four hours of sleep on a good night. This struggle is one that is shared by thousands of people who battle every single day. Something that people who are not on the frontlines don’t seem to understand is that we are currently fighting an all-out nonviolent war. This movement is a relentless battle that demands 24/7 commitment. 
Since this movement has taken off, many organizations that cover our actions and operate on the periphery of the movement are now receiving large donations and funding, partly as a result of our efforts. They also deserve to be rewarded for their vital work. However, the people putting their bodies on the line daily and doing all the heavy lifting need to have their basic needs met as well. It's incredibly disheartening to see career "activists," that have failed for years to do what we have done, fundraise off our backs, while the real fighters and change-makers go hungry. 
Clearly, after the last five months of intense battle, I'm growing increasingly weary and frustrated by this lack of respect. We need to do a better job of raising funds ourselves. I admire and respect people who try to make the world a better place for a living, but your words of support mean little without substantive actions behind them. This is a nonviolent war, not yet another swanky gabfest conference filled with well-paid suits righteously yapping about someday creating the structural change that anyone with half a political clue knows we urgently need now. Enough with your comfortable talks, it's time for ACTION! So stop hoarding funds and resources while the real fighters are out on the frontlines.
Not everybody in America is hurting equally from the financialization of our democracy and economy. As these charts from master chartist Doug Short show, the incomes of the elderly (65 and up) continued rising while every other age group's income tanked:

The top 5% and top 20% have seen their incomes decline along with everyone else, but their incomes rose at much faster rates than the bottom 80% during the financialization boom: Yes, the top quintile's income declined a bit, but $169,000 a year isn't too shabby....

The incomes of the top 20% who generally benefitted from financialization blew past the lower 80% when financialization took hold in the early 1990s:

The incomes of everyone 54 and under has plummeted from the peak in 2000, and the bottom 80% saw little boost from the financialization of the economy since 1990. Obviously, it's the young and middle-aged workers who are taking the biggest hit; add in high unemployment rates for those entering the workforce and it's clear the younger workers are suffering the most.

If you're one of those who support the movement to limit the power and predation of the banks/Wall Street Elites, and you're doing OK financially, please consider stepping up to the plate and donating $20 for a copy of this engaging account of the single most important social movement of the decade.

"And what country can preserve it's liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance?" Thomas Jefferson (

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Tuesday, February 28, 2012

What's Your Favorite "On the Ground" Recession Indicator?

Beautifully maintained trophy cars are being dumped for cash. What does that say about the "real" economy?

Everybody has their own "on the ground" recession indicators: the mall parking lot, the tony restaurant that used to be packed every weekend, and so on.
I have two favorites: freight trains rumbling south down the main line of the West Coast and "sell your own car" used car lots.

The freight trains are self-explanatory: at the top of the housing bubble, they were loaded with flatcars of lumber. Now? A lot of empty flatcars and container flats. A lot. Yes, the official statistics indicate rising rail traffic, but they must mean one more car has a load in a 100-car train and there's only 20 empties. The freight trains I see are still running with beaucoup empty cars.

There may be some explanation of why this is so, but I can report that these trains pulled no empties in 2007.

"Sell your own car" lots reflect the "private market" for used cars. If you want to know what people are trading in for new cars, then go look at new car dealers' used lots. At the local Honda dealer, I saw a number of Lexus SUVs on their used lot; people trading down to save on gasoline?

I've sold a few cars myself at the local "sell your own car" lot, so I know it's reputable and a model that works for buyers and sellers. For a flat fee, you park your car on their lot and price it however you want. Potential buyers get to test-drive it, take it to their mechanic, etc. It's a big lot, so the selection of cars and prices is suggestive of larger trends--at least to me.

Back in 2009 at the initial depths of the recession, the used Toyotas and Hondas vanished and the lot filled with Volvos and other big-car-payment brands. I took this to reflect people were ditching their car payments and snapping up older reliable cars they could buy for cash and get another 100,000 miles out of.

I hadn't been by the lot in a while and what I saw astonished me. The lot was packed with "fun" cars and luxury brands: four recent-vintage Cooper-Minis were lined up (none sold in the week I monitored the lot). A cute yellow VW Beetle--another "fun" car-- was over by the Mercedes. Yes, Mercedes, and Porsches, all beautfully maintained.

For the first time in the two decades I've scanned this lot, it was chockful of luxury cars: a pristine black 2002 Porsche Boxter with low mileage that raised my blood pressure and sorely tempted me because it was "priced to sell"--and for a Scots-Irish-French tightwad, that's saying something; an equally beautiful Mercedes 500-series two seater, low mileage, brand-new in appearance; a fairly decent Jaguar; another pristine 300-series Mercedes, a classic, unbelievably well-maintained Porsche 911 (1991)-- the list goes on.

In the good old days, these "still look new" luxury cars would have been snapped up at these prices. But now they sit here, unsold, day after day.

Another class of "fun" car was also represented--the muscle car: a very clean recent vintage red Trans Am attracted onlookers in one corner of the lot.

Sellers can add comments to the sales tag, and on at least two of the luxury vehicles it was noted that the car had been their father's, one owner. Others indicated the original owner was selling.

If you know some car buffs, or you are one, then you know what these low-mileage super-clean luxury cars represent: they represent the lifetime achievement car for a guy, or the trophy car the rising exec takes out on the weekend. There is no other explanation for a 10-year old car to have 17,000 miles, or 33,000 miles--they were all garaged and enjoyed as a third or fourth car.
It seems Dad is getting too old to drive, or it's no longer feasible to ease into the low-slung Porsche, and so he's given it to one of his kids. And the kid drove it to the lot to turn into cold hard cash.

As for the "fun" cars: maybe they're still selling big numbers of new vehicles, but the glow of owning a mediocre-mileage car with no room for the dog or kids seems to be fading for existing owners. My sister-in-law spent a fortune having her Mini Cooper fixed last year, and our friend with a cutsy VW Beetle had a repair bill after a few years of ownership that could have bought a decent used car instead.

For whatever reason, "fun" cars that I never saw on the lot before are now there in abundance.
This is all anecdotal, of course, and wide open to interpretation. If you go to the techie-hipster favored neighborhoods in San Francisco, the tony cafes and restaurants are crowded: there's plenty of Web 2.0 money floating around. If you only look at these concentrations of talent and free-flowing investment capital, the economy looks like it's booming. Ditto if you try to book a table near the Opera on performance night: there's plenty of old money around that can spend $100 per dinner, too.

Once again, there were no older Toyotas or Hondas on the lot, only a few 2-year old models asking near-new prices. I interpret this thusly: older reliable cars that will last another five years without major expense are snapped up immediately, and superfluous "fun" cars and luxury trophy vehicles are being turned into cash.

When people are driving their pride and joy cars out of their pampered garages and selling them for cash, not trading them in for a new car or keeping them for pleasure, I think that's saying something about the "real" economy you won't find if you hang around Twitter HQ or the bejeweled Opera crowd.

You may intepret it differently, of course. That's the beauty of "on the ground" recession indicators. 

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Monday, February 27, 2012

The Perfection of Crony Capitalism: Use Regulation to Destroy Competitors

Crony capitalism uses its wealth to impose government regulations designed to hinder, cripple and destroy small business competitors.

In the U.S. we now have the perfection of cloaked crony capitalism: corporate cartels use their vast concentrations of capital and revenue to buy the political leverage needed to write regulations specifically designed to eliminate competition.

Recall that the most profitable business model is a monopoly or cartel protected from competition by the coercive Central State. Imposing complex regulations on small business competitors effectively cripples an entire class competitors, but does so in "stealth mode"--after all, more regulations are a "good thing" (especially to credulous Liberals) which "protect the public" (and every politico loves claiming his/her new raft of regulations will "protect the public.")

This masks the key dynamic of crony capitalism: gaming the government is the most profitable business model. Where else can you "invest" a few hundred thousand dollars (to buy political "access" and lobbying) and "earn" a return in the millions of dollars, and eliminate potential competitors, too? No other "investment" even comes close.

The ever-expanding galaxy of regulations that business owners have to meet is a function of the corruption of government, i.e. corporations lobbying the government to pass laws and regulations (usually written by industry lobbyists to the specifications of their clients) specifically designed to eliminate competition by raising the costs of compliance amd imposing heavy fines via enforcement.

As an example, let's take a slice of American mythology, the family farm, that is under increasing pressure from just this sort of Corporate-State crony capitalism.Consider the family-owned small to medium size farmer who understands that the farm is a nature-based system that requires certain practices to maintain the health of the farm and the quality of your produce/meat/milk.

Suddenly a number of corporate agribusiness farms (i.e. concentrated animal feeding operations--CAFO) spring up nearby where thousands of pigs/cows are crammed into huge barns and the operation is run like a factory, enabling the CAFO to produce meat or milk at a significantly cheaper cost or production.

What's left out of the equation is the pollution to the environment and any associated health costs and damages to the values of the neighboring properties (Of course, these CAFOs are never sited near an affluent neighborhood).

In addition, the quality of the meat is suspect, as all the potential disease outbreaks that come with monoculture practices and crowded conditions can only be suppressed with constant, massive quantities of antibiotics. This is the perfect condition--animals packed together, plentiful manure, constant use of antibiotics--to create super-bugs that are resistant to antibiotics. Life being what it is, opportunistic and adaptive, eventually these resistant bacteria find a new and unprotected host, human beings.

A small family farm cannot duplicate these risk factors; only CAFOs can generate this kind of bacteriological danger to the populace.

These kinds of systemic costs created by the CAFOs are transferred to the taxpayer, including the local farmer who has to compete with the CAFO.

Since government in the U.S. is always for sale, and since the revolving door between the legislative and regulatory agencies and the lobbying industry is always spinning, it's straightforward to hire "the right people" and "express your concerns" to the corrupt politicos.

Here are some examples of the crony-capitalist favors corporate lobbying and campaign contributions can buy:

1) The government may give massive direct subsidies to the CAFO, depending how effective the "farm" lobby is (most farm subsidies go to large agribusinesses and not to small farmers).

2) The government will pass regulations that apply to the farmer's operations but require an entire new layer of compliance, reporting etc. that is beyond the financial capability of small operations.

3) The government may initiate enforcement actions against the farmer for non-compliance and if he's not rich, he will get steamrolled by the government regulators because he can't hire adequate legal representation.

4) The government often will not penalize the CAFO on the same relative basis, if it is part of a large corporation which have the resources to fight the government in the courts (i.e. the enforcement personnel don't have the necessary resources to do long protracted battles with Panzer divisions of corporate lawyers).

5) When there's an incident of blatant government over-reach or corporate favoritism that gets press coverage, the government agency will say they will "revamp the system" which is a code-phrase for passing even more regulations that secures them even more power.

In other cases, the regulatory agency was hampered from doing its job due to corruption/lobbying/political pressure from powerful corporate players.

As the regulatory thicket expands in complexity and scope, many of the regulations will not be adequately enforced because enforcement is now beyond the capability of the agency tasked with enforcement and monitoring. But the small/medium farmer will have to comply with them anyway, and if they don't, then that leaves a door open for corporate-directed regulators to take them down later with heavy fines for non-compliance.

6) The government gets complaint tips from a CAFO about the independent farmer, so he's subjected to a rigorous compliance inspection, whether or not the complaint is legitimate. It's like the vehicle inspections you get if you're caught "driving while black"-- with enough effort, some violation somewhere can be trumped up into a fat fine.

7) The regulations become so complex that prosecutors are reluctant to bring then to court because they're worried that a jury may not understand them. As a result, criminal cases are rarely brought against CAFOs and other corporate cartels.

After a few cycles of crony capitalism, competition has been destroyed, and you end up with something like America's "sickcare" system: no matter where you go, there's only two health insurance providers and their pricing is (surprise!) always about the same (it's called price fixing; that's the way cartels work).

Regulations don't arise unbidden; they arise to accomplish two tasks:

1. Enforce crony capitalism by eliminating or crippling competitors and establishing highly profitable cartels or quasi-monopolies protected by a bought-and-paid-for Central State.

2. They justify the budgets and payrolls of government agencies at all levels of government. A few years ago I mentioned a town that was trying to add a commuter train stop to an existing rail line. The process involved something like nine agencies, and as a result it has yet to be approved, a decade later. But the application did create a decade of justification-for-our-budget for agencies that might have been revealed as wasteful friction without the make-work application to diddle over for a decade.

For a common-sense overview of the death-spiral of regulation, please read Over-regulated America: (The Economist) The home of laissez-faire is being suffocated by excessive and badly written regulation.

The only way anything will change is if money is banned from politics (i.e. all elections are taxpayer-financed) and lobbying is also banned. As long as the legislative and regulatory branches of government are for sale, then willing corporate buyers will be crowding round the kiosk, buying profitable slices of corrupt crony-capitalism for their own gain. If you don't, your competitor will, and then you'll be eliminated as "dangerous competition." That's the essence of crony capitalism. 

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Saturday, February 25, 2012

This Is Small Business in America: Burdened, Crushed, Doomed

If you make it increasingly costly and risky to open a small enterprise, then no wonder unemployment remains high.

You hear a lot about Kafkaesque stifling bureaucracy in Greece and other struggling European nations, but America's Status Quo is trying its best to destroy small enterprise with taxes and crushing bureaucracy. I am self-employed, and have been for most of my life. When I did take a paid position, it was in other small enterprises or local non-profit organizations.

I mention this because there is an unbridgeable divide in any discussion of small business between those who have no experience in entrepreneural enterprise (i.e. they've worked for the government, NGOs/non-profits or Corporate America their entire careers) and those who have.

There are all sorts of similar chasms that cannot be crossed and which quickly reveal a surreal disconnect from actual lived reality: for example, the difference between actually playing football--yes, with pads, a muddy field and guys trying to slam you to the ground--and being an armchair quarterback who's never been hit even once, never caught a pass or ever struggled to bring down a faster, bigger player. (And yes, I did play football in high school as a poor dumb skinny kid who mostly warmed the bench for good reason, but I lettered.)

At the extreme of this disconnect, we have armchair generals screaming for war who have no experience of combat or war as it is actually experienced.

You get the point: it's very easy for well-paid pundits who have never started a single real enterprise or met a single payroll to pontificate about "opportunity" and small business as the engine of growth, blah blah blah. It's also easy for those with no actual experience to reach all sorts of absurd conclusions about how easy it is to turn a small business into great wealth. (No, Bain Capital or other Wall Street outposts of financialization are not "small business.")

In real life, it's only easy to run a small business into the ground, especially when there's a thousand tons of junk fees, taxes and useless bureaucratic requirements on your back. Lest you think this an exaggeration, consider that it took two years and $200,000 to open an ice cream parlor in a vacant retail space:
"Ms. Pries said it took two years to open the ice cream parlor, due largely to the city’s morass of permits, procedures and approvals required to start a small business. While waiting for permission to operate, she still had to pay rent and other costs, going deeper into debt each passing month without knowing for sure if she would ever be allowed to open.“It’s just a huge risk,” she said, noting that the financing came from family and friends, not a bank. “At several points you wonder if you should just walk away and take the loss.”
Ms. Pries said she had to endure months of runaround and pay a lawyer to determine whether her location (a former grocery, vacant for years) was eligible to become a restaurant. There were permit fees of $20,000; a demand that she create a detailed map of all existing area businesses (the city didn’t have one); and an $11,000 charge just to turn on the water."
There is nothing mysterious about the cause of this Kafkaesque Status Quo:each city, county, state and Federal fiefdom must justify its existence and payroll, and everyone in each fiefdom will fight with every fiber of their being to protect their turf. Politically, it's a fight to the death to trim even the thinnest slice of bureaucracy, and so little if any ever gets trimmed.
Nobody will care until the city, county and state's revenues collapse as people opt out of supporting the bloated dead-weight of the Status Quo with their own sweat and blood.

The only way to survive is to not have a "real" business, i.e. you write code in your living room or parents' basement, or you do enough business in the informal sector (cash) to support your high-cost formal business.

Taxes and bureaucracy are not just urban phenomena, as this insightful report from Eric in Texas shows. Eric draws a critically important causal line between the stifling of small enterprise and high structural unemployment: if you make it so costly, risky and burdensome to start a business and hire people, then no wonder unemployment is high and will stay high.
One of your recent posts made me think of how difficult reinventing communities and coming up with creative solutions for the problems of unemployment and displaced people in our society is. I think it has to do mainly with the way in which lower middle class / middle class people are overburdened with taxation. As you stated in your post, the amount of taxation is staggering. Especially for the self employed, like myself. 
My wife and I pay much the same percentage taxes as you listed in your post. I live in a rural area of Texas and from time to time small acreage properties go up for sale around our home. If we wanted to buy some adjacent acreage for the purpose of inviting a few of our friends, who are teetering on the edge of unemployment and facing the prospect of real poverty, to live next to us and help each other grow food, take care of livestock and find creative self employment opportunities in our area together, the resultant burden of taxation would prevent it. 
For example, as I see it, my wife and I would now be paying property taxes on two properties, one would not have the homestead exemption. Any "improvement" on the new property, e.g. a small house built for our friends, would only increase the property taxes. We would also have to consider, if we planned to live together in this way long term with the major contribution of our "unemployed" friends being their labor and time invested in our communal living experiment, what kinds of taxes we might be subject to in the future based on the way we are using each others time and energy to achieve solutions for food production, child rearing, shelter, etc. I don't know if we would be subjected to any taxation in doing these things only assuming we might be. 
To attempt to sum up my reaction to your post, I will make a list of what I think would impede a lower middle class person who has some discretionary income and could provide a small house and small acreage for the benefit of a few friends on the brink of poverty, with the view to the arrangement being ultimately beneficial to all involved. 
1. Increased property taxes
2. The possibility of providing mandatory health insurance through "Obama care"
3. Taxes and or restrictions on what produce we can sell through farmer's markets or through the Internet, e.g. the recent crackdown on raw milk sells, and "cottage foods" like goat cheese, homemade pies, homemade canned goods, etc. In other words, if our whole way of life is to produce locally grown food for ourselves and our extended "family" and this is threatened through excessive regulation and or taxation, I wonder if it's really realistic to pursue.
4. In Texas taxes are rising, even in this recession school taxes, property taxes, fees, etc. are all going up.
5. Federal taxes look like they are poised to increase. 
If I didn't have to worry about taking on the burden of all these forms of taxation, property taxes being the most onerous to me, I might could use what capital I have to invest in a communal living arrangement that I would hope to be of benefit to my family and some of our friends. 
It's the idea, ultimately, that I want to reinvent my community (for me that means bringing friends in close relationship in mutual work for mutual benefit) and provide opportunities to contribute. But if that means having to tangle with bureaucrats over how much more I now owe because of my desire to do these things, I think I will be doing better to try to take care of myself, my wife, and our children, and leave the rest of my loved ones to prayer and occasional modest charity. 
In short, if we were not taxed every time we tried to do something, we just might damn well do something! 
Let's focus on getting rid of property taxes, and other forms of ridiculous taxation so that we can free up our energy and time to do the very things you advocated so well in your post. 
I realize the benefit to myself and so many of some forms of government assistance, for example food stamps, child tax credit, energy efficiency rebates.... I think good government programs could be sustained if we did things like close our military bases around the world, brought the troops back to the states, and made education and real estate much less expensive, and allowed people to grow and market local foods without encumberance.
You wrote:
Here is the ugly truth about the Savior State, welfare state, social welfare state, or whatever you choose to call the Central State: The Savior State displaces and destroys community and social capital. By making individuals dependent on the Central State for free money, free food, free housing, etc., then the State has taken over the natural function of community. 
In my opinion, it is also that the Savior State displaces and destroys even the potential for ( my main point) community and social capital. By placing oppressive, punitive, discouraging, and unreasonable forms of taxation on individuals who may otherwise extend resources of capital towards helping their neighbors, friends, and even family. In this way, then, the State has decided to oppress and retard the development of communities.
Well said, Eric, thank you. Before you jump in to "correct" this view of small enterprise in America, first list how many enterprises you have started, owned or run, and how many people were/are on your payroll.

If you think it's so easy to get rich in small business, then here's the keys, and payday's on Friday. 

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Friday, February 24, 2012

What Rising Gasoline Prices Do to the Economy

Charting gasoline prices against income and GDP provides some interesting results.

Since rapidly rising gasoline prices are in the news, let's look at some charts of gasoline and the economy, courtesy of frequent contributor B.C. These depict income and GDP in a ratio with the price of gasoline, and so they reveal information that is not contained in charts showing only the price of gasoline or GDP.

Here is disposable personal income and the price of gasoline:

When real (inflation-adjusted) wages are stagnant and the price of gasoline is high, as was the case in the late 1970s and the recessionary early 1980s, the ratio is low. If income is stagnant and the cost of gasoline is high, then people have less money to spend on other items and the economy is also stagnant--exactly what occurred after the 1979 Iran Crisis pushed gasoline prices up. (Sound familiar?)

When gasoline is relatively cheap and incomes are rising, then the ratio is high. Thus when oil prices hit bottom and incomes were rising in the late 1990s, then the ratio was peaking.

Look at it now. The ratio spiked in 2009 as oil prices plummeted from $140 per barrel in 2008 to less than $40 by the end of 2009.

Since incomes are stagnant (actually down since the 2007 top) and gasoline is once again on the rise, the ratio is returning to recessionary levels.

Here is GDP and the price of gasoline:

As B.C. noted: "These charts show that wages, incomes, and GDP have fallen dramatically in relation to the increase in the price of gasoline (and energy in general) since the secular peak in the late '90s to early '00s." The ratio is back to the recessionary levels of 1990 and 2008 and not far above the "oil shock" stagflation of the 1970s.

If the government portion of GDP is removed, what's left is private GDP to gasoline prices:

This chart shows the secular decline in the private economy from the late 60s into the late 1980s, and the expansion of the 1990s. The ratio once again began a secular decline from its peak in the Internet boom years of 1999-2000, and then fell off a cliff in the 2008-9 recession.

Though it has recovered a bit, the ratio suggests that in terms of private (non-government) GDP and the price of gasoline, the private-sector economy is plumbing depths that are unprecedented in last 45 years. (The "oil shock" stagflationary 1970s look resilient by comparison, and the nation wasn't borrowing 10% of its GDP every year, either.)

Yes, the Federal government can cover up the damage by borrowing 10% of GDP each and every year ($1.5 trillion, and don't forget to add in the off-budget "supplementary appropriations"), and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the "recovery."

My apologies to email correspondents: I have been under the weather this week and am completely tapped out.

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Thursday, February 23, 2012

What's Next for Capitalism After the Current Version Implodes?

Has the centralized nation-state model of global capitalism finally reached its autumn?

Predicting the end of Capitalism has been a popular pastime since the term was coined. The reason why this particular parlor game is so fruitless is that Capitalism is not monolithic or static--and neither is socialism, the other great ideological umbrella that covers a variety of systems and iterations of State/collective ownership of assets.

If we take the long-term historical perspective of Giovanni Arrighi in The Long Twentieth Century: Money, Power and the Origins of Our Times, we find that modern global Capitalism has gone through four iterations, each of which saw the dissolution of the old order and the emergence of an even greater source of capital and power. Arrighi has built upon the epic structure created by Fernand Braudel in his three volume history of modern Capitalism, Civilization & Capitalism, 15th to 18th Century, a series I have often recommended here to anyone who seeks to understand the origins and nature of modern Capitalism:
The Structures of Everyday Life (Volume 1)
The Wheels of Commerce (Volume 2)
The Perspective of the World (Volume 3)

Though we could easily start with Venice in the 14th century (that would make it five transitions), Arrighi begins with the trading/banking powerhouse of Genoa and lists the following expansive iterations that replaced the previous version when it reached the apogee of its particular model and fell into decline: Holland, Great Britain and the U.S.

What sets Arrighi's analysis apart is his identification of a "grand cycle" that has not been recognized by other historical models of Capitalism's development (and oft-predicted impending demise). This is not a cycle of price and scarcity described so compellingly inThe Great Wave: Price Revolutions and the Rhythm of History, or a demographic cycle as described in The Fourth Turning or the "S-curve" cycle of over-reach and marginal return described so ably in Overshoot: The Ecological Basis of Revolutionary Change and The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization, nor is it a Kondratieff cycle of expansion and repudiation of credit.

Rather, this is a cycle internal to global Capitalism, and in particular the top layer of mobile capital that Braudel identifies as the "real home of Capitalism." In this view, centers of capital expand beyond the boundaries set by the previous dominant center when the old regime declines in an inevitable "autumn."

Each iteration of mobile Capitalism has limits intrinsic to its model, and when those limits are reached, then the regime slides into an S-curve (a simple model for complex systems by Cesare Marchetti) of topping out and decline.

The question this analysis poses is this: once the U.S. founders on its debt and debauchery of its currency, is this the end of the centralized model of global expansion? Put another way: given that the U.S. empire--commercial, military, diplomatic and financial--already spans the entire globe in a completely unprecedented fashion, is any further expansion even possible?

No doubt when Great Britain's empire was at its peak in the late 19th century, an even more dominant expansive iteration did not seem possible. But given the reach of the U.S. model--hundreds of overseas military installations, naval dominance, control of the global currency, etc.--then it is difficult to imagine what future empire could exceed America's global reach and influence.

The alternative is a new iteration of global capitalism based on decentralized systems that have detached from the coercive control of any one nation-state. In this view, the disruptive technology is the Internet, which has enabled the flow of digital capital and innovative models beyond the direct control of nation-states.

We cannot know the precise flow of history over the next decade (to 2022), but we do know the nation-state model of global Capitalism that relies on ever-expanding debt and constant depreciation of the nation's currency to mask fundamental financial instability and insolvency is doomed.

There are only two possible end-states to the current model of global Capitalism,i.e. ever-expanding debt (both sovereign and private) and constant depreciation of the nation's currency: repudiation of the State's gargantuan debts via default or destruction of the nation's currency. There are no other end-states, despite all the happy-talk propaganda issued by the Status Quo.

Perhaps global Capitalism's next iteration will be a repudiation of the centralized coercive nation-state model of expansion. The limitations of State-issued currency is now painfully obvious, as States cannot resist borrowing money to live beyond their means or printing money to live (at least for a time, until the theft become visible) beyond their means.

Global versions of bitcoin or a new non-sovereign gold-backed currency may become the currency of capital and trade, a decentralization of power that would enforce a strict financial discipline on nation-states' borrowing and blatant manipulation of their own currency. Simply forcing nation-states to live within their means by removing the power of the printing press would greatly diminish the power of the nation-state model of global Capitalism.

Global Capitalism is like an organism in some ways, and the decline of the current model will open space, much like a forest fire clears dead wood and underbrush, for more adaptable, less rigid and coercive models to experiment and develop.

My apologies to email correspondents: I have been under the weather this week and am completely tapped out. 

Thank you, John S. (USN) ($50), for your awesomely generous contribution to this site -- I am greatly honored by your ongoing support and readership.Thank you, Gustavo G. ($50), for your magnificently generous contribution to this site -- I am greatly honored by your support and readership.


Wednesday, February 22, 2012

When Risk Is Disconnected From Consequence, the System Itself Is at Risk

If we understand risk cannot be eliminated, it can only be transferred, then we will understand why the current financial trickery in Europe and elsewhere is doomed to fail.

The entire global economy's fundamental financial instability can be traced back to one simple rule of Nature: risk cannot be eliminated, it can only be transferred to others or masked. And when it is transferred to others or masked, then the causal feedback between risk and consequence is severed.

Once risk has been disconnected from consequence, then it is impossible to discover the price of capital and risk. Once capital and risk have been mispriced, then the inevitable result is misallocation of capital and a positive feedback loop of self-referential, self-reinforcing risk.
Once the causal negative feedback of the real world--consequence--is no longer available to those taking on risk, then only positive feedback remains. Positive feedback inevitably leads to runaway reactions that self-destruct.

This can be illustrated by imagining yourself in a casino where a consortium will guarantee your losses up to $1 million. We call the disconnect of risk from the resulting gain/loss "moral hazard," and to understand the ramifications of moral hazard, we need only compare the actions of two gamblers in the casino: one is using his own money, the other has none of his own capital at risk, and his losses will be covered up to $1 million.

How much risk will you take on in gaming if you can lose $1 million without any loss to yourself? Obviously, we will accept enormous risks because if we win the high-risk bet, the gain will be ours to keep. Low-risk bets yield low returns but high-risk bets yield high returns.
If our losses will be transferred to others, then why waste time betting on low-risk, low-return "red" at the roulette wheel? Let's bet on single numbers because the payoff will be astronomical.

If we actually score a few high-risk "wins," this success feeds our risk appetite.This is a positive feedback loop: our wins reinforce our risk appetite, while negative feedback (the losses from losing bets) no longer register--they have been eliminated from our calculations of risk and gain.

This positive feedback eventually leads us to make stupendously large bets.Eventually, we bet $1 million on a high-risk play and lose. We are wiped out, but oh well, it was fun while it lasted. If we were especially disciplined and clever, we squirreled away some of our winnings in our own account: we kept the gain and the consortium took all the losses.

The risk didn't vanish, it was simply transferred to others who now bear the cost of the unfettered risk being played with abandon. The consortium who financed the no-risk gambling spree now has to absorb the $1 million in loss. If the consortium masked its own risk by presenting a phantom financial security to the casino, then the casino will have to absorb the loss.

In effect, the risk was transferred to the entire system. Since the consortium is made up of many investors, and the casino has many investors, then the risk and loss was effectively spread over many participants. The $1 million loss, catastrophic to any one player, is effectively distributed to everyone in the system.

When losses are trivial compared to the size of the system, then this distribution of transferred risk results in a modest loss to all participants.

But let's suppose the player with the $1 million backstop was extraordinarily successful with insanely high-risk bets, and he built the $1 million stake into $100 million, which he then rolled into several stupendous bets.

He loses, because the risk of gambling hasn't been elminated, it has only been masked and transferred to others. Now the consortium faces a loss 100 times its guaranteed backstop, and since its capital is only $10 million, it is also wiped out and leaves the casino with $90 million in uncollectible debt.

If the casino needs that $90 million to pay its own speculative debts, then it too will be wiped out.

This is how one player who manages to mask or transfer risk to others can bring down entire systems. The risk only appears trivial and manageable at the start, but since the negative feedback of consequence (reality) has been eliminated from the players' perspective, then risk piles up in a self-reinforcing positive feedback.

Since the system itself has disconnected risk from consequence with backstops, guarantees and illusory claims of financial security, then it is has lost the essential feedback required to adapt to changing circumstances. As the risk being transferred to the system rises geometrically, the system is incapable of recognizing, measuring or assessing the risk being transferred until it is so large it overwhelms the system in a massive collapse/default.

The consortium has only two ways to create the illusion of solvency when the punter's $100 million bet goes bad: borrow $100 million from credulous possessors of capital or counterfeit it on a printing press. These are precisely the strategies being pursued by central banks and states around the globe. BUt since risk remains disconnected from gain/loss, then capital and risk both remain completely mispriced.

Risk is being transferred to the entire global financial system at a fantastic rate, because counterfeiting money or borrowing it on this scale to cover losses creates new self-reinforcing feedbacks of risk.

As long as risk is being masked or transferred to others who don't reap the gain, they only reap the losses, then the system is doomed to self-reinforcing instability and eventual collapse.

The only solution is to enforce the causal connection between risk and consequence: those who took the risk have to absorb all the loss. Since risk cannot be eliminated, it can only be masked or transferred, then all the tricks that are being played out in Europe, China, Japan and the U.S. are only enabling risk to pile ever higher in the system itself.

At some unpredictable stick/slip point, the accumulated risk will cause the system to implode like a supernova star.

Interviews with CHS and Zeus Y. are now available:
My recent interview with Max Keiser (I appear via Skype about halfway)

Thank you, Ilya Z. ($50), for your immensely generous contribution to this site -- I am greatly honored by your support and readership.Thank you, Philip P. ($20), for your most generous contribution to this site -- I am greatly honored by your support and readership.


Tuesday, February 21, 2012

What Happens When Phantom Profits Vanish?

As the U.S. dollar strengthens against other currencies, the phantom corporate profits generated by a devaluing dollar will vanish.

One of the dirty little secrets of the stock market rally is that the rising corporate profits that powered it are largely phantom profits. Why are they phantom? Because they are artifacts of currency devaluation, not an increase in efficiency or production of goods and services.

Though few domestic observers make mention of it, the large, global U.S.-based corporations are now dependent on non-U.S. sales for about 40% of their revenues (50% and up for many companies) and virtually all their profit growth. Overseas sales are made in the local currency: the euro, yen, renminbi, Australian dollar, Canadian dollar and so on, and the profits are stated in U.S. dollars on corporate profit and loss statements.

In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 in 2008 as the U.S. dollar depreciated against the euro. That $ .60 of profit was phantom, an artifact of the depreciating dollar; it did not result from a higher production of goods and services or greater efficiencies.

This is why profits earned in non-U.S. markets have risen so dramatically even as domestically earned profits have stagnated. The U.S. dollar has declined dramatically against the currencies of our major trading partners, boosting phantom profits across the board when the non-U.S. profits are converted to U.S. dollars on corporate profit and loss statements.

The Federal Reserve has actively pursued a policy of devaluing the dollar, supposedly in the hopes of expanding exports as it became cheaper to buy goods and services denominated in U.S. dollars. While exports have nudged up as the dollar lost value, the truly significant result of this policy was boosting foreign exchange-generated profits of global U.S. corporations.

Now that the Federal Reserve has lowered interest rates to zero, trying to depreciate the dollar further is like pushing on a string. Short of direct foreign exchange (forex) intervention--buying other currencies in bulk and selling dollars to flood the market with USD--there is little the Fed can do to manipulate the $2 trillion-a-day foreign exchange markets.

The strengthening dollar is putting these vast phantom profits at risk. Were the U.S. dollar to return to its 2002 relative value in other currencies, virtually all the phantom (forex-generated) corporate profits that have justified the stock market rally will vanish.

Though very few consider it possible, much less likely, the U.S. dollar could actually rise significantly as other currencies price in the currently understated risk to their economies. Were that to happen, U.S. corporate profits earned in other currencies would actually decline, even if revenues remained constant.

If the global economy is indeed sliding into recession, then maintaining revenues will be a challenge. More likely, sales will drop and so will profits as the dollar reverses and overseas profits plummet when converted to dollars.

In other words, if the dollar continues strengthening against other currencies, say good-bye to rising corporate profits--and the stock market rally based on ever-expanding corporate profits. Is it any wonder that the Powers That Be look upon a strengthening dollar (recall a rising dollar increases the purchasing power of all who hold it, i.e. U.S. residents and those holding dollar-denominated bonds) with fear and loathing? Alas, the Federal Reserve is not all-powerful in forex markets, despite its gargantuan hubris and absurdly inflated reputation.

Interviews with CHS and Zeus Y. are now available:
My recent interview with Max Keiser (I appear via Skype about halfway)

Thank you, Mark S. ($25), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.Thank you, David K. ($50), for your immensely generous contribution to this site -- I am greatly honored by your ongoing support and readership.


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