Friday, August 14, 2020

Here's Why the "Impossible" Economic Collapse Is Unavoidable

This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy.
A collapse of major chunks of the economy is widely viewed as "impossible" because the federal government can borrow and spend unlimited amounts of money because the Federal Reserve can create unlimited amounts of money: the government borrows $1 trillion by selling $1 trillion in Treasury bonds, the Fed prints $1 trillion dollars to buy the bonds. Rinse and repeat to near-infinity.
With this cheery wind at their backs, conventional pundits are predicting super-rebounds in auto sales and other consumption as consumers weary of Covid-19 and anxious to blow their recent savings borrow and spend like no tomorrow.
As for the 30+ million unemployed--they don't matter. Conventional analysts write them off because they weren't big drivers of "growth" anyways--they didn't have big, secure salaries and ample wealth/credit lines.
What this happy confidence in near-infinite money-printing and V-shaped spending orgies overlooks is what I've termed denormalization, an implosion of the Old Normal so complete that the expected minor adjustment to a New Normal is no longer possible.
The "New Normal" Is De-Normalization
We're already in a post-normal world because the expansion of globalization and financialization needed to fuel the Old Normal has reversed into contraction. This reversal is an extinction event for all sectors and institutions with high fixed costs: air travel, resort tourism, healthcare, higher education, local government services, etc. because their fixed cost structures are so high they are no longer financially viable if they're operating at less than full capacity. 
Only getting back to 70% of previous capacity, revenues, tax receipts, etc. dooms them to collapse.
And there's no way to cut their fixed costs without fatally disrupting all the sectors that are dependent on them.
Most operational costs are mandated and cannot be reduced: union contracts, property taxes, regulatory burdens, tax accounting, debt service, employee healthcare costs, minimum wages, etc.  Other essential expenses such as commercial rent are difficult to renegotiate lower, as the landlord also has the same high fixed costs and any reduction comes directly out of his pocket.
A good example of this collapse dynamic is a restaurant with high fixed costs.  It can't survive financially at 50% of capacity because it can't reduce its expenses by 50%. The owners can reduce staff but there are operational limits on this: even if there are only 10 customers rather than 100, you still need a kitchen and wait staff. Stripped to the bone, the owners might be able to reduce costs by 15% to 20%. In other words, if business rebounds to 80% of pre-pandemic levels, the restaurant can survive but not generate any profit.
It might survive at 70% if the owners do double shifts, but that isn't sustainable. Eventually the overworked owners burn out and collapse.
Reducing costs is even more difficult for institutions such as hospitals, colleges and government agencies. Most of these institutions are unable to cut more than a few percent of expenses; a 10% reduction in expenses would require the closure of entire departments and eliminating core services.
Denormalization is an interlocking series of self-reinforcing feedbacks. People have less money and more insecurity, so they spend less. Those living off the fixed costs paid by the private sector (landlords, local government, insurers, etc.) can't survive on less than their full measure, and this inability to absorb massive cuts causes everyone in the food chain above them to collapse, which eventually triggers their own collapse.
The restaurant can't cut any of the big-ticket expenses: rent, taxes, wages, benefits, healthcare, tax accounting, insurance, etc. It can only lay off some staff and reduce its purchase of ingredients. Those variable costs are too small a percentage of total expenses to be consequential.
The restaurants collapse first, and since there's no way anyone can afford to pay current rents and survive on a shrinking customer base, the landlord goes bust next. These collapses cut local government tax revenues. Each of these reductions means everyone down the food chain-- enterprises that depended on restaurants, landlords and local government contracts--lose a critical chunk of their own revenues. Since there are no replacement sources of revenues, these collapse as the line of dominoes topple.
Few sectors or institutions have any buffers. They've been running at full capacity or higher and burning every dollar to keep from imploding. As a result, any deep cuts are extinction events: no income from college football means eliminating entire sports down the food chain. There is no stair-step down, there's only binary triage: save this program as is or eliminate it entirely.
Federal/Fed subsidies don't fully replace what's been lost. Giving the restaurant owner a subsidy to pay rent and stay open doesn't mean the restaurant has enough customers to keep staffing and purchases at pre-crisis levels, and giving consumers subsidies such as Universal Basic Income (UBI) doesn't mean these households won't decide to save some of that subsidy rather than spend every dime, as the zeitgeist has shifted from complacent confidence to uncertainty: any subsidy is subject to change, as it is ultimately a political decision that can be amended or cancelled.
The production of goods and services stagnates as demand declines. When money-printing expands while goods and services contract, the result is inflation--the purchasing power of the newly issued money declines as too much money starts chasing a pool of goods and services that's shrinking as small businesses dry up and blow away and the dominoes fall down the supply chain of dependent industries.
As the newly issued subsidy-money buys fewer goods and services, demands for increased subsidies rise. The Universal Basic Income (UBI) payment doubles from $1,000 to $2,000 a month, but it still only buys $750 of goods and services as the declining purchasing power of the newly printed money accelerates.
This expansion of money as the pool of goods and services contracts further accelerates the loss of purchasing power in a self-reinforcing feedback.
I have long admired John Michael Greer's concept of catabolic collapse, a dynamic in which the institution is forced to downsize some of its costly complexity but it restabilizes at a lower energy state. I now think this might be overly optimistic.
A stair-step down to consequentially lower complexity and cost structures is simply not practical in much of the real world as fixed costs are mandated by regulations or impossible to cut for operational reasons. (For example, reducing a fleet of airliners by half doesn't necessarily translate into an ability to reduce aircraft maintenance facilities and staff by the same percentage.)
Airports, airlines, cruise ships, sport franchises, resorts, malls, local government services, venues, theaters, hospitals, universities and so on can't reconfigure at 50% of previous complexity and capacity. Their fixed costs and mandates simply don't allow for a 50% reduction in complexity and revenues.
This is why denormalization is an extinction event for much of our high-cost, high-complexity, heavily regulated economy. Subsidizing high costs doesn't stop the dominoes from falling, as subsidies are not a substitute for the virtuous cycle of re-investment.
The Fed's project of lowering the cost of capital to zero doesn't generate this virtuous cycle; all it does is encourage socially useless speculative predation as Tim Cook et al. sell Apple bonds in order to buy back more shares of Apple, further enriching Tim Cook et al. This is not a virtuous cycle, it is the denormalization of what remains of free markets, which require capital be priced by markets, not central banks.
Collapse isn't "impossible," it's unavoidable.
There was no New Normal for the dinosaurs. A few winged species survived and evolved into the birds of today, but that is by no stretch of the imagination a New Normal that included all the other dinosaur species. For them, denormalization meant extinction.
De-Normalizationeverything that was normal is gone and will not be replaced with some new normal.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Thursday, August 13, 2020

The "New Normal" Is De-Normalization

Here's what denormalization means: there was no "New Normal" for the dinosaurs.
Everyone talks about the "New Normal," as if there's a guarantee that life will return to normal. But the "New Normal" is De-Normalization, which I define as everything that was normal is gone and will not be replaced with some new normal. In other words, normal is gone, done, over: old normal, new normal, doesn't matter: normal is history.
Denormalization is currently used to describe a database optimization process, but it's too valuable a concept to be limited to a narrow geekspeak term.
What I mean by Denormalization is the complete dismantling of what was taken for granted as normal and the loss of any future version of normal. Consider sports as an example. We all know the Old Normal that millions hope will magically return: $100 million player contracts, millions in TV ad revenues, pro franchises worth billions of dollars, NCAA playoffs, etc.: a dominant kingdom in the nation's media and mindshare.
The dirty little secret that troubled the kingdom long before Covid-19 was a steady erosion in attendance at live games and in the viewing audience. Younger generations have relatively little interest in all the trappings and habits of Boomer sports manias. They'd rather watch the 3-minute highlight video on their phones than blow half a day watching games that are generally lacking in drama and are largely replaceable with some other game.
What few seem to notice is that the Old Normal had become insanely expensive, irksome and boring, activities that were habits coasting on momentum. Those embedded in the Old Normal acclimatized to the absurdly overpriced seats, snacks, beer, parking, etc. of live events and the insanely long commutes required to get to the venue and then back home, as their happy memories of $5 seats decades ago is the anchor of their lifelong devotion and habits.
The old fans coasting on ritual habituated to the cookie-cutter nature of the games, while those who never acquired the habit look with amazement at the seemingly endless dull progression of hundreds of interchangeable sporting events.
Advertisers will eventually notice that younger generations never acquired the habit of worshipping sports and so there is nothing to stem the collapse of the Old Normal but older fans, some percentage of whom will find they don't miss it once they fall out of the habit.
Some other percentage will find they can no longer afford to attend live games, or they'll realize they no longer feel it's worth it to grind through traffic or public transit just to sit for additional hours and then repeat the entire slog back home.
Another percentage will suddenly awaken to the artifice of the whole thing; they will simply lose interest. Others will finally realize the corporate machine (which includes college sports) has long since lost any connection to the era that they remember so fondly.
This same Denormalization will dismantle fast food, dining out, air travel, healthcare, higher education and innumerable other iterations of normal that have become unaffordable even as the returns on the lavish investments of time and money required diminish sharply.
How many of you deeply miss air travel? You're joking, right? Only certifiably insane people would miss the irksome hassle and discomfort, from the endless delays due to mechanical problems (don't you people keep any spare parts, or is it all just in time like every other broken system in America?), the seats that keep getting smaller as the passengers keep getting larger, the fetid terminals, and so on.
Like all the other iterations of normal, the entire experience has been going downhill for decades, but we all habituated to the decline because we were stuck with it.
What few seem to understand is all the Old Normal systems can't restabilize at some modestly lower level of diminishing returns; their only possible future is collapse. Just as fine-dining restaurants cannot survive at 50% capacity because their cost structure is so astronomical, the same is true of sports, airports, airlines, cruise lines, fast food, movie theaters, healthcare, higher education, local government services and all the rest of the incredibly fragile and unaffordable Old Normal.
None of these systems can operate at anything less than about 80% of full capacity and customers paying 80% of full pop, i.e. full retail. Since their fixed cost structures are so high, and their buffers so thin, there's nothing below the 80% level but air, i.e. a quick plummet to extinction.
Here's what denormalization means: there was no New Normal for the dinosaurs. A few winged species survived and evolved into the birds of today, but that is by no stretch of the imagination a New Normal that included all the other dinosaur species. For them, denormalization meant extinction.
De-Normalizationeverything that was normal is gone and will not be replaced with some new normal. Normal is gone, done, over: goodbye to all that.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Wednesday, August 12, 2020

Could Wall Street Lose the Election?

Two simple regulations would drive a stake through Wall Street's corrupt, evil heart.
While the corporate media is focused on the presidential election, perhaps the more interesting question is: could Wall Street Lose the election? That is, could Wall Street face potentially fatal restrictions regardless of who wins?
If this seems farfetched, consider the history of abrupt social-political-financial turn-arounds that surprised the mainstream. Off the top of my head I would point to Big Tobacco and environmental controls on Big Industry.
For decades, Big Tobacco was politically invulnerable. Big Tobacco greased the political machinery with huge contributions to politicos and massive lobbying campaigns to deny the self-evident reality that smoking was hazardous to human health.
Every effort to change this political dominance was thwarted with ease--and then suddenly, Big Tobacco fell out of favor. Politicians who had collected millions of dollars in Big Tobacco bribes--oops, I mean campaign contributions--without any blowback were suddenly in the spotlight as enablers of an industry that had remorselessly killed millions of its customers while claiming that tobacco's health effects were still a matter of debate and/or choice.
Practically overnight the political walls protecting Big Tobacco crumbled as all the lies and political complicity that had long been accepted as "normal" were denormalized.
Big Industry encountered little political resistance to its decades-long dumping of industrial waste into the nation's waterways and air until 1970. Images of American rivers catching fire changed public perceptions and eventually even Big-Business-friendly Republicans supported environmental regulations that cost Big Industry tens of billions of dollars in new costs.
Turning our attention to hitherto invulnerable Wall Street: the masses are awakening to what insiders have known all along: Wall Street is nothing but a skimming machine for insiders, and this is generating a fulsome hatred of Wall Street, Big Tech monopolies and the billionaires who've added half a trillion dollars in wealth in the current stock market rally while the rest of America crumbles.
When the political winds shift decisively, both parties quickly sense the change in weather. When social-economic tides change, politicos understand they face a binary choice--either get on board or cling to the past and lose elections.
If the cultural tides have shifted against Wall Street and its politically protected skims and scams, every politico will have to get on board in one way or another, or they'll be left behind. When the social tide shifted, politicos threw Big Tobacco and Big Industry overboard without hesitation.
Two simple regulations would drive a stake through Wall Street's corrupt, evil heart:
1. A substantial tax on every single transaction of any kind, whether it's on an exchange or off-exchange, and most importantly, whether the bid for a transaction was executed or not. This would kill high-frequency trading (HFT) and various other front-running games (spoofing the system with bids that are withdrawn in milliseconds, etc.).
A transaction tax wouldn't affect Mom-and-Pop investors or mutual funds, as they trade infrequently. It would only kill the parasitic Wall Street predators.
2. A ban or even limit on corporate share buybacks would kill the stock market's primary engine of relentless insider gains: corporations buying back their own shares to goose their stocks higher even as their sales and profits stagnate. It's estimated that up to 75% of all stock market gains can be traced back to the hundreds of billions of dollars corporations have borrowed to buy back their own shares.
It's worth recalling that share buybacks were illegal not that long ago, so banning share buybacks would simply be a return to common sense limits on Wall Street's skims and scams.
Two simple regulations would end Wall Street's most blatant insider scams. These regulations have now entered the mainstream and are poised to become actionable.
When the social tides shift, politicos have to do something. To do nothing is no longer an option, and there is no creature on Earth more willing to jettison sacred cows than a politico fearful of being left behind as social trends abruptly change.
The rising hatred of Wall Street, Big Tech monopolies and insider scams is not yet visible to the mainstream, but that doesn't mean the tides aren't shifting. It just means the corporate mainstream is as clueless as the politicos basking in the billionaires' bribes.

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


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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