2019: The Three Trends That Matter

Look no further than Brexit in Britain, the yellow vests in France and the Deplorables in the U.S. for manifestations of a broken social contract and decaying social order.

Among the many trends currently in play, Gordon Long and I discuss three that will matter as 2019 progresses: 2019 Themes (56 minutes)

1. Final stages of the debt supercycle

2. Decay of the social order/social contract

3. Social controls: Surveillance capitalism, China's Social Credit system, social globalization

The basic idea of the debt supercycle is simple: resolving every crisis of over-leveraged speculative excess, evaporation of collateral and over-indebtedness by radically increasing debt eventually leads to an implosion of the entire credit-based financial system.

The final stages of the current debt supercycle are manifesting all sorts of interesting cross-currents: de-dollarization and the unprecedented expansion of debt in China to name just two.

De-dollarization describes the efforts of many nations to reduce their dependence on U.S. dollars for trade and reserves. Since the USD remains the largest reserve currency in both trade and reserves, this trend threatens to reorder the entire global financial system, with potentially disruptive consequences not just to the USD but to a variety of institutions and norms.

China's total systemic debt has soared from $7 trillion in 2008 to $40 trillion in 2018. This is of course only a rough estimate, as China's enormous Shadow Banking System is famously opaque, as are many of its institutional and corporate balance sheets.

China has embraced the narrative of "growing our way out of stagnation by quintupling debt," but the banquet of consequences of this speculative orgy is finally being served: China's dramatic slowdown in 2018 is just the appetizer course of the banquet of consequences.

This excerpt of a recent (and immediately censored) talk given by a Chinese economist illuminates the result of debt-fueled mal-investment and speculation on a grand scale:

A Great Shift Unseen Over the Last Forty Years:

Look at our profit structure. To put it plainly, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the profit of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?

When we buy stocks, we are buying the profits of the company, not hype and rumors. I recently read a report comparing the profits of China’s listed companies with those in the U.S. There are many U.S. public companies with tens of billions dollars in profits. How many Chinese tech and manufacturing companies are there that have accomplished this? There is only one, but it’s not listed, and you all know which one that is. [Xiang is referring to Huawei, the Chinese tech company.]

What does this tell us? As Yale professor Robert Shiller said: stock market performance may not work as a barometer of the economy in the short run, but it does for sure in the long run. So I think that the terrible stock performance only demonstrates one thing, which is that the real economy in China is in quite a mess. Where is the stock market rebound? I think it’s obvious that investor confidence has yet to recover."

Look no further than Brexit in Britain, the yellow vests in France and the Deplorables in the U.S. for manifestations of a broken social contract and decaying social order. The politically invisible / financially vulnerable have declared we're still here to their globalized elite aristocrats, and this rebellion against elite domination and profiteering is being demonized by the corporate-state media as populism rather than what it really is: a full-blown revolt of the working class.

In response, the ruling elites have instituted social controls via ramped up official propaganda, Social Credit Scoring in China and private-sector Surveillance Capitalism in the U.S.

All these forms of social control seek to marginalize, suppress and censor dissent, alternative sources of information, alternative narratives and financial independence: hence the sudden eltist interest in Universal Basic Income (UBI) and similar central-state dependency programs: nothing suppresses a working class revolt quite like free money for keeping quiet, passive and obedient.

But some sectors of the working class are not willing to accept the bribes; they're holding out for actual political power, and this is why the ruling elites of France have responded to the yellow vest movement with such savagery.

Gordon and I discuss these trends and much more in our podcast 2019 Themes(56 minutes).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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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Telltale Signs of Recession

I'm seeing lifestyles that are out of stock and no longer available, even in China.

Though every recession is unique, all recessions manifest in similar ways in the real economy. By real economy, I mean the on-the-ground economy we observe with our own eyes, as opposed to the abstract statistical model reflected in official declarations of when recessions begin and end.

One characteristic that never makes it into the abstract statistical representation of recession is the light switch phenomenon: business suddenly dries up, as if someone turned a light switch off. This is especially visible in discretionary purchases, which include everything from smart phones to vehicles to eating out.

Other telltale signs of recession include:

Dead giveaway #1: businesses that seemed established and doing well suddenly close. The customers are surprised, the employees are not; they knew sales were eroding while costs were rising, and the financial situation was becoming increasingly precarious.

Dead giveaway #2: new businesses that would have thrived a few years ago close within a few months. Maybe it was the multitude of competitors, or the high rents; but for whatever combination of factors one attributes the demise to, an enterprise that seemed to have all the ingredients for success fails quickly.

Dead giveaway #3: advertising and marketing / promotion no longer move the needle. Campaigns that reliably increased sales no longer work.

Dead giveaway #4: Matriarchs and patriarchs of established enterprises retire. They typically offer rote explanations for their abrupt retirement--to spend time with the family, to enjoy the leisure they never had working 12-hour days, and so on--but the unspoken reason is their decades of experience have finely tuned their recession detectors. They know when it's about to become impossible to grow revenues and they no longer have the need or energy to buckle down and survive the decline phase of their enterprise's S-Curve.

Dead giveaway #5: a cliffdive in new business and new customers / clients. If 3 or 4 new customers would sign up every day in the good old days, suddenly nobody's signing up, regardless of the promotions offered. Then existing customers start drifting away. If you ask why, you get routine answers: family budget cuts, time constraints, etc. Interestingly, these didn't have any impact in good times, and yet suddenly they're like a virulent virus: everybody's got budget cuts and time constraints.

Dead giveaway #6: promotions increasingly give off the pungent scent of desperation. That airline credit card that once offered 25,000 free miles once you spend $1,000 are now offering 50,000 miles on the first use of the card, even if it's for a cup of coffee at Starbucks. Then the offer edges up to 60,000 miles for customers on the airline's flights, and so on.

New renters that were previously offered some throwaway promo (once month "free" gym membership, etc.) are suddenly being offered a free month's rent to sign the lease.

Dead giveaway #7: multiple offers for homes vanish like mist in Death Valley in July. Real estate and home remodels / additions are the most sensitive canaries in the coal mine; they keel over at the first whiff of declining asset valuations and the first hint that greed has flipped polarity to fear.

Dead giveaway #8: the "fun" third vehicles and the inherited sports cars start showing up on CraigsList and "for sale by owner" lots. One of my favorite memories of the 2008-09 meltdown / recession was reporting on all the used Porsches I saw on the local "sell by owner" lot. One of my longtime correspondents said that if he saw me toodling around in a 911, he was canceling his financial support of my work. (Surrender my 1998 Civic for a sports car? Perish the thought--though it was a tempting fantasy....)

Needless to say, I didn't pick up a heavily discounted recent-vintage Porsche, though the prices were amazingly attractive. (Recall my innate frugality.)

The Only Leverage We Have Is Extreme Frugality (December 27, 2013)

Bonus dead giveaway #9: the IPO of the tech unicorn that was sure to be a roaring success is suddenly cancelled.

You undoubtedly have your own dead giveaways that the cycle has turned from expansion and greed to contraction and fear. I'm seeing plenty of dead giveaways the economy is already in recession--what are you seeing?

I'm seeing lifestyles that are out of stock and no longer available, even in China:

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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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Brace for Impact

As credit-asset bubbles pop, the dominoes start falling.

The economy is far more precarious than the surface boom/bubble suggests. A great many households, enterprises and municipalities are in overloaded boats whose gunwales are just a few inches above the water; the slightest wave will swamp and sink them.

The cost structure of the economy is completely out of whack with what households and enterprises can afford. There are several dynamics in play:

1. Enterprises have already stripped out all the expenses they can: head count has been cut, quality has been gutted, quantity has been reduced, supply chains have been squeezed, inventory controls trimmed to just-in-time and so on. There are no easy, quick cost reductions available except laying off employees. Every other cost-cutting strategy has been milked dry.

2. Costs are soaring despite the low rate of officially measured inflation. I recently found some notes from 1995--a long time ago, 24 years. The dot-com bubble--the first of this era's three great asset bubbles--was inflating rapidly but official inflation was low, around 2.5% to 3% annually.

A slice of pizza was $1.50, a main dish in a Chinese restaurant was $4.50 and rent for a one-bedroom apartment in the S.F. Bay Area was $650/month. Now the pizza slice is $4.25 plus 9.25% tax, $4.65; the main dish is $11.95 plus 9.25% tax, $13.05, and rents for one-bedroom apartments far exceed $2,000/month in desirable neighborhoods.

Official inflation is $1 in 1995 equals $1.67 today. So a $1.50 slice of pizza in 1995 should cost $2.50 today, the $4.50 main dish should cost $7.50, and the $650 monthly rent should be $1,085. Real-world inflation has outstripped the bogus official rate in sector after sector. So TVs have dropped in price; big deal. How often do you buy a TV?

Costs have tripled in 24 years, but have wages tripled? No. In many cases, they haven't even kept pace with official inflation, much less real-world inflation. How many people earning $40,000 in 1995 are now earning $67,000, the minimum increase needed to match the rise in official inflation? Nobody I know. How many positions paying $40,000 in 1995 are now paying $120,000 for the same job? I think we can safely say none.

3. The majority of gains in income and wealth have flowed to the top 5%, and most of the gains in the top 5% have flowed to the apex of that income bracket. So when we read that average household wealth has increased or median wages have increased, the reality is these statistics mask the actual distribution of income and wealth gains, which are skewed heavily to the top 5% income/wealth brackets.

This chart is a few years old but the trend hasn't changed.

Long-term distribution of gains continues to favor the top 1%.

Enterprises are precarious because their costs are high and there's nothing left to cut. A relatively modest decline in revenues will cut profits / owners' incomes to less than zero.

Households in high-cost regions are barely above water. Any reduction in household income will push these households into insolvency.

As credit-asset bubbles pop, the dominoes start falling. As real estate rolls over, lending and construction activity decline, triggering layoffs. As household income takes a hit, the days of spending $15 for lunch every day plus a $5 coffee and $4 bagel go away. The only way for enterprises absorbing revenue declines to survive is to lay off employees, which reduces the pool of consumers with disposable income.

Relying on the free-spending top 5% is also a recipe for fragility. The highest paid employees are the last plum target left for corporate cost-cutters, and the biggest targets for software/AI/automation. The janitors making minimum wage ($15/hour now in many locales) are not that exposed to automation, and the gains would be modest any way. But reducing the head count of employees earning $120,000 and up makes a significant positive impact on the bottom line as revenues stagnate or plummet.

Sorry, boom-time America: the lifestyle you ordered in now out of stock and we have no indication it will be in stock again within the foreseeable future.

In summary: brace for impact.


Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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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China's S-Curve of Expansion, Stagnation and Decline

All the policies that worked in the Boost Phase no longer work.

Natural and human systems tend to go through stages of expansion, stagnation and decline that follow what's known as the S-Curve. The dynamic isn't difficult to understand: an unfilled ecological niche is suddenly open due to a new adaptation; a bacteria evolves to exploit a new host, etc. Expansion is rapid until the niche is fully occupied, and then growth matures and stagnates; the low-hanging fruit has all been picked, and it's much more costly to reach what little is left.

Human economies starved of capital, credit, access to markets and freedom are akin to unexploited ecological niches. Lacking capital, credit and the freedom to innovate, experiment and advance, economies wallow in a self-reinforcing stagnation.

Should capital, credit, access to markets and freedom become available, the economic expansion can be breath-taking. This is the basic script of postwar Japan and the Asian Tiger economies: economies with either minimal or war-damaged infrastructure, limited capital/credit and stifling status quo power structures that limited the freedom of the populace to access markets and innovations were suddenly open to credit, markets and innovation.

This territory of opportunity was quickly exploited in the Boost Phase: all the low-hanging fruit could finally be picked.

In the Boost Phase, policies that open the economy to credit and innovation generate virtuous cycles of expanding credit, markets, capital, employment and development. In the Boost Phase, everyone's a genius; everyone joining the land rush can get a piece of the action.

In this expansive phase, everyone extrapolates this rapid growth into the future, as if the Boost Phase can last essentially forever. Thus all sorts of pundits predicted that Japan's late-bubble GDP of 1989 would soon surpass the GDP of the U.S.

A year later, Japan's bubble burst and it has wallowed in stagnation since. The policies of the Boost Phase all work because any loosening of limits works wonders in economies with an abundance of low-hanging fruit. But once the easy fruit's been picked, those policies no longer have the same efficacy. In fact, policies that worked wonders are now active impediments, as they were designed for an era that has passed: all the low-hanging fruit is long gone.

We cling to whatever seems to have worked so gloriously in the past, long after the virtuous cycles have turned into self-defeating cycles that only deepen the stagnation and rot. Japan's core policies remain fixed in 1955, or 1965 if one wants to be generous. Other than Softbank, no major Japanese corporations have emerged since 1955. The central state / central planning model of state agencies coordinating the expansion of exports with major corporations is now crippling Japan; that model worked wonders from 1955 to 1989 and then its internal limits became apparent.

The heavy cost of corruption that was offset by growth in the boost phase becomes destructive in the stagnation phase. Stripped of growth, the economy is sapped by institutionalized corruption: bribes, sweetheart deals, poor quality being ignored, accounting fraud--all become embedded and institutionalized, to the detriment of organic growth.

As a result of one disastrous policy after another--The Great Leap Forward, The Cultural Revolution--China's 1989 economy was mired in 1949. Once the leadership enabled modest reforms that opened access to credit and markets, and the central planning machinery started building infrastructure at a scale unseen in world history, China's Boost Phase took off.

But just as trees don't grow to the moon, no Boost Phase lasts beyond the depletion of the low-hanging fruit. Rational investments in infrastructure and housing inevitably give way to speculative gambles, the classic recipe for mal-investment and excessive leverage that guarantee a collapse of the resulting credit and asset bubbles.

China entered 2008 with $8 billion in officially counted debt; 10 years later that debt is $40 trillion, plus unknown trillions more in the shadow banking system which expanded the options for risky speculation and massive expansions of credit.

Like all the other stagnating economies, China's "solution" to stagnation was to expand debt-funded speculation and "investments" with little to no actual return.

The high water mark of China's financialization orgy was 2018. From now on, adding debt simply adds more drag on the underlying economy, as income is diverted to service speculative debt and defaults start hollowing out both the official banking system and the shadow banking system.

All the policies that worked in the Boost Phase no longer work. the policy tool chest is empty, and so China's leadership is doing more of what's failed: burying bad debt off the visible balance sheets, re-issuing new loans to pay off defaulted debt, and all the usual tricks of a failed banking/credit system.

Japan has papered over its systemic rot and decline for 30 years by using a financial Perpetual Motion Machine: the state borrows and spends trillions by selling bonds to the central bank, which in effect prints "free money" for the state to burn propping up a sclerotic, corrupt, failed status quo.

If that's policy makers' idea of success, they are delusional. Credit/asset bubbles all deflate, and central bank buying of assets only gives the lie to the illusion of stability and market liquidity.

Simply put, there is no indication China's leadership has any plan to manage the inevitable stagnation and decline of China's economy that is now painfully obvious to anyone with the slightest willingness to look beneath the flimsy propaganda of official statistics. They are not alone, of course; every other major economy is equally bereft of policies and equally dependent on bogus statistics and debt to paper over the decline.

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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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The Coming Global Financial Crisis: Debt Exhaustion

The global economy is way past the point of maximum debt saturation, and so the next stop is debt exhaustion.

Just as generals fight the last war, central banks always fight the last financial crisis. The Global Financial Crisis (GFC) of 2008-09 was primarily one of liquidity as markets froze up as a result of the collapse of the highly leveraged subprime mortgage sector that had commoditized fraud (hat tip to Manoj S.) via liar loans and designed-to-implode mortgage backed securities.

The central bank "solution" to institutionalized, commoditized fraud was to lower interest rates to zero and enable tens of trillions in new debt. As a result, total debt in the U.S. has soared to $70 trillion, roughly 3.5 times GDP, and global debt has skyrocketed from $84 trillion to $250 trillion. Debt in China has blasted from $7 trillion 2008 to $40 trillion in 2018.

A funny thing happens when you depend on borrowing from the future (debt) to fund growth today: the new debt no longer boosts growth, as the returns on additional debt are increasingly marginal. This leads to what I term debt exhaustion: lenders can no longer find creditworthy borrowers, borrowers either don't want more debt or can't afford more debt, and the cost and risk of the additional debt far outweigh the meager gains. Whatever credit is issued is gambled in speculations that the current bubble du jour will continue indefinitely.

Unfortunately, all central banks know how to do is goose liquidity to inflate asset bubbles and juice the issuance of more debt. If asset bubbles start to deflate, then central banks start buying mortgages, empty flats, stocks and bonds to prop up markets that would otherwise implode.

Equally unfortunately, propping up asset bubbles and stimulating more debt to chase speculative gambles only increases the fragility of the asset bubbles and the economy that has come to rely on them for "growth". A useful concept here is debt saturation: just as an absorbent material can only hold so much water, a corporation, household or economy can only support so much debt before servicing the debt reduces income and increases the risk of default.

The global economy is way past the point of maximum debt saturation, and so the next stop is debt exhaustion: a sharp increase in defaults, a rapid decline in demand for more debt, a collapse in asset bubbles that depend on debt and a resulting drop in economic activity, a.k.a. a deep and profound recession that cannot be "fixed" by lowering interest rates or juicing the creation of more debt.

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)

My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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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