Sunday, May 21, 2017

TINA's Legacy: Free Money, Bread and Circuses and Collapse

TINA's legacy is revealed in this chart of the Venezuelan Bolivar, which has plummeted from 10 to the US dollar to 5,800 to the USD in a few years of rampant money-emission.
Every conventional "solution" to the systemic ills of our economy and society boils down to some version of free money: Universal Basic Income (UBI) schemes-- free money for everyone, funded by borrowing from future taxpayers (robots, people, Martians, any fantasy will do); debt jubilees funded by central banks creating trillions out of thin air, a.k.a. free money, and so on.
Free money is compelling because, well, it's free, and it solves all the problems created by burdensome debt and declining incomes for the bottom 95%. Just give every household $100,000 of free money that must be devoted to reducing interest, then give every household $20,000 annually for being among the living, and hey, a lot of problems go away.
But is creating money out of thin air really truly free? There are two appealing answers: yes and yes. If the Treasury literally prints money, it's almost "free," and if the Federal Reserve creates money and buys bonds paying near-zero yields, the money that is borrowed into existence is almost free because the interest due is so minimal.
The problem, of course, is that creating free money is not quite the same as creating new wealth. New wealth is a new gas/oil field that comes online, new cropland that produces a new source of food, new goods and services, etc.
In effect, every dollar of free money reduces the purchasing power of all existing units of currency unless the expansion of output (additional goods and services) matches or exceeds the added dollar.
This line of thinking is driven by two realities: governments have issued many promises to their citizens, employees, corporations, etc. These include pensions, medical care, backstops against losses, tax breaks, subsidies, and on and on in an endless profusion.
In order to fund these promises, governments must borrow immense sums of money that will never be paid back. The only way governments can afford to borrow immense sums that pile up oh-so quickly is if interest rates are kept near-zero for all eternity (or until the current generation of politicians retires, or the currency follows Venezuela's currency to near-zero, whichever comes first).
As long as interest rates are kept near-zero, even $20 trillion in debt is manageable. Never mind if debt triples every few years--it's affordable if interest rates are near-zero.
Everybody can borrow more at near-zero rates: governments, banks, consumers--it's the cure-all to every debt burden. The problem is rates can never rise, lest the house of cards collapses.
$20 trillion at 5% interest requires an annual interest payment of $1 trillion--one-third of all federal revenue. $30 trillion at 10% interest would consume 100% of all federal tax revenues, leaving nothing for all the programs, obligations and promises of the central state.
Allow me to introduce TINA--there is no alternative to low rates forever and emitting of immense sums of new currency (not new wealth or productive output--just new currency) to fund various modern-day versions of bread and circuses for everyone.
TINA's legacy is revealed in this chart of the Venezuelan Bolivar, which has plummeted from 10 to the US dollar to 5,800 to the USD in a few years of rampant money-emission. Free money is certainly compelling, at least to those desperate to cling to power, but sadly, newly emitted currency is never actually free.
At the height of its giveaways of free bread and endless distractions of public entertainment, Rome's population is estimated to have been close to 1 million.
After the collapse of bread and circuses, the population of Rome eventually fell to roughly 25,000. But no worries--this time it's different. We'll get away with it because we buy our own debt, technology is deflationary, and so on. Simply put: the free bread and circuses will never end because we're so powerful and nothing is outside our control.


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Friday, May 19, 2017

Want to Understand Rising Wealth Inequality? Look at Debt and Interest

"Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must)."
I often refer to debt serfdom, the servitude debt enforces on borrowers. The mechanism of this servitude is interest, and today I turn to two knowledgeable correspondents for explanations of the consequences of interest.
Correspondent D.L.J. explains how debt/interest is the underlying engine of rising income/wealth disparity:
If we use $16T as the approximate GDP and a growth rate of, say, 3.5%, the total of goods and services would increase one year to the next by about $500B.
Meanwhile, referencing the Grandfather national debt chart with the USDebtClock data, the annual interest bill is $3 trillion ($2.7 trillion year-to-date).
In other words, those receiving interest are getting 5-6 times more than the increase in gross economic activity.
Using your oft-referenced Pareto Principle, about 80% of the population are net payers of interest while the other 20% are net receivers of interest.
Also, keep in mind that one does not have to have an outstanding loan to be a net payer of interest. As I attempted to earlier convey, whenever one buys a product that any part of its production was involving the cost of interest, the final product price included that interest cost. The purchase of that product had the interest cost paid by the purchaser.
Again using the Pareto concept, of the 20% who receive net interest, it can be further divided 80/20 to imply that 4% receive most (64%?) of the interest. This very fact can explain why/how the system (as it stands) produces a widening between the haves and the so-called 'have nots'.
In other words, the wealthy own interest-yielding assets and the rest of us owe interest on debt.
Longtime correspondent Harun I. explains that the serfdom imposed by debt and interest is not merely financial servitude--it is political serfdom as well:
As both of us have stated, you can create all of the money you want, however, production of real things cannot be accomplished with a keystroke.
Then there is the issue of liberty. Each Federal Reserve Note is a liability of the Fed and gives the bearer the right but not the obligation to purchase — whatever the Fed deems appropriate. How much one can purchase keeps changing base on a theory-driven experiment that has never worked. Since the Fed is nothing more than an agent of the Central State, the ability to control what the wages of its workers will purchase, is a dangerous power for any government.
If a Federal Reserve Note is a liability of the central bank, then what is the asset? The only possible answer is the nations productivity. So, in essence, an agent of the government, the central bank, most of which are privately owned (ownership is cloaked in secrecy) owns the entire productive output of free and democratic nation-states.
People who speak of liberty and democracy in such a system only delude themselves.
Then there is the solution, default. That only resolves the books, the liability of human needs remain. Bankruptcy does not resolve the residue of social misery and suffering left behind for the masses who became dependent on lofty promises (debt). These promises (debts) were based on theories that have reappeared throughout human history under different guises but have never worked.
More debt will not resolve debt. The individual’s liberty is nonexistent if he does not own his labor. A people should consider carefully the viability (arithmetical consequences) of borrowing, at interest, to consume their own production. The asset of our labor cannot simultaneously be a liability we owe to ourselves at interest.
Thank you, D.L.J. and Harun. Is there an alternative to the present system of debt serfdom and rising inequality? Yes, there is, one I describe in my book A Radically Beneficial World: Automation, Technology & Creating Jobs for All. But is an alternative system possible? Not in our Financialized, Neofeudal-Neocolonial Rentier Economy; but this doesn't mean the status quo is permanent. As Harun noted in another email,"Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must)."
Correspondent J.F. recently submitted a helpful way of conceptualizing $1 trillion: One million seconds ago was eleven days ago. One billion seconds ago was 1982. One trillion seconds ago was 30,000 BC.
Here is federal debt, topping $20 trillion and soaring to the moon:
What we're really discussing is what will replace the current system after it self-destructs.


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Wednesday, May 17, 2017

The Soft Underbelly of Scandinavian "High-Tax Happy-Capitalism"

Central planning based on central-bank inflated debt-asset bubbles works until it doesn't.
A media mini-industry touts Scandinavia's "happiness" as the result of its high-tax, generous welfare state-capitalism. This mini-industry conveniently fails to report the soft underbelly of Scandinavia's "High-Tax Happy-Capitalism": The high-tax, generous welfare model is just as dependent on unsustainable credit bubbles as every other version of state-capitalism.
The glossy surface story goes like this: state-capitalism creates a happy, secure society if taxes are high enough to fund generous social welfare benefits for everyone. People are happy to pay the higher taxes because they value the generous benefits they receive.
The story has an implicit message: every state-capitalist society could become happy if only taxes were raised high enough to fund generous social welfare for all. There are many versions of this narrative, for example, the appealing (but financially impractical) "tax the robots" funded Universal Basic Income (UBI) that I have repeatedly debunked.
Put another way: state-managed capitalism works just great if high earners and companies pay high enough taxes to fund a rebalancing of wealth and income via social welfare transfers.
The reality is quite different from this glossy PR narrative. The Scandinavian economies have pursued the same unsustainable debt-bubble "fix" for their structural insolvency as other state-managed nations.
As the charts below reveal, the "happy" Scandinavian nations are now dependent on unprecedented debt/housing bubbles inflated by extreme monetary stimulus. The script is the same as in every other monetary "experiment" intended to create the illusion of solvency in an insolvent system: lower interest rates to zero (or below-zero if you're really desperate), juice the financial system with liquidity/ easy credit, and base your measures of financial "health" on housing bubbles and other debt-based gimmicks. (Charts courtesy of the Acting Man blog)
Also left unmentioned is the Scandinavian reliance on export sectors for national income. This is of course the German model: make your money exporting to other nations that are over-borrowing to fund consumption.
So what happens when consumption in the importing nations crashes when debt bubbles pop? The economies of the export-dependent nations also implode. This is the inconvenient consequence of having an export-dependent economy.
Also left unsaid is the imperialist wealth amassed by the mini-empires of Denmark and Sweden. Denmark and Sweden had smaller but no less imperialist interests as the larger imperial powers, and ownership of foreign assets remains a hidden mainstay of their national incomes.
Put another way: if you want to be rich, start out rich.
Norway is a special case in two ways. Norway only won its full political independence from Denmark and then Sweden in 1905. Its current wealth is the direct result of a depleting resource: North Sea oil and gas. While Norway has amassed a large sovereign-wealth fund, it has already started to draw upon this fund.
The fund is of course largely invested in the usual debt-bubble-dependent "assets" that are doomed to implode along with the fiat currencies they prop up.
Does this explosion in Norway's M2 money supply look healthy or sustainable to you? If so--what are you high on?
Does Sweden's insane real estate bubble look healthy or sustainable to you? If so--what are you high on?
Does Denmark's unprecedented levels of household debt look healthy or sustainable to you? If so--what are you high on?
Take away these unsustainable bubbles, and how "happy" will these economies (or their suddenly impoverished residents) be? Central planning based on central-bank inflated debt-asset bubbles works until it doesn't. The day of reckoning draws ever nearer in every economy that's created the illusion of solvency with debt/asset bubbles and export-dependent economies.


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Tuesday, May 16, 2017

Why We're Fragmenting: The Status Quo Is Disintegrating

The system is disintegrating, and slapping a "reformist" coat of paint over the dryrot cannot renew the structural timbers that have rotted to their very core.
I confess to being amused by the mainstream media's implicit view that everything would be peachy if only Trump wasn't president. Memo to MSM: the nation is fragmenting for reasons that have nothing to do with who's president, or indeed, which party is the majority in Congress, who sits on the Supreme Court, or any other facet of governance.
The nation is fracturing and fragmenting because the Status Quo is failing the majority of the citizenry. The protected few are reaping all the benefits of the Status Quo, at the expense of the unprotected many.
As I have outlined many times, this unsustainable asymmetry is the only possible outcome of our socio-economic system, which is dominated by these forces:
1. Globalization--free flow of capital, labor arbitrage
2. Nearly free money from central banks for financiers and corporations
3. Pay-to-play "democracy"
4. State protected cartels that privatize gains and socialize losses
5. A system stripped of self-correcting feedback and accountability
Once you understand the inputs and structure, you realize there is no other possible output other than unsustainably expanding debt and wealth/income inequality. Policy tweaks cannot change the output; all they do is provide an illusion of reform that serves the need of those at the top to obscure the systemic injustices and unsustainability of the extractive, exploitive, predatory, parasitic system that's enriching them.
What do people do when centralized systems fail to deliver what was promised? They fragment into smaller "tribes" and find fewer reasons to cooperate in centralized systems. As historian-economist Peter Turchin explained in his 2016 book Ages of Discord, human history manifests cycles of social disintegration and integration in which the impulse to cooperate in large social structures waxes and wanes.
Turchin identified 25-year cycles that combine into roughly 50-year cycles, comparable (though not identical with) Kondratieff's proposed economic cycles.
These 50-year cycles are part of longer 150 to 200-year cycles that move from cooperation through an age of discord and disintegration to a new era of cooperation.
These long cycles parallel the cyclical analysis of David Hackett Fischer, whose masterwork The Great Wave: Price Revolutions and the Rhythm of History I've referenced many times over the years, most recently in We've Entered an Era of Rising Instability and Uncertainty (July 18, 2016).
Turchin's model identifies three primary forces in these cycles:
1. An over-supply of labor that suppresses real (inflation-adjusted) wages
2. An overproduction of essentially parasitic Elites
3. A deterioration in central state finances (over-indebtedness, decline in tax revenues, increase in state dependents, fiscal burdens of war, etc.)
These combine to influence the social order, which is characterized in eras of discord by declining loyalty to self-serving special interests (disintegration) and in eras of cooperation by a willingness to compromise for the good of the entire society (integration).
As I have often explained, centralization is now a disruptive drag rather than a benefit. Centralization provided widespread gains in efficiencies in its boost phase, but now that it is sliding down the S-curve, it only benefits the few at the expense of the many.
The returns on centralization have diminished to less than zero: centralization's primary outputs are now corruption, lack of accountability, cronyism, complexity moats and bureaucratic thickets that obscure the self-serving nature of centralized power.
The structural failure of our political-economic system cannot be remedied by electing a new president or swapping failed political parties. The system is disintegrating, and slapping a "reformist" coat of paint over the dryrot cannot renew the structural timbers that have rotted to their very core.
Identifying cycles can be a parlor game, but there is no denying that we're deep into a disintegrative phase that will probably come to a head between 2021 and 2029.


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Monday, May 15, 2017

State of Denial: The Economy No Longer Works As It Did in the Past

There's no Plan B for a state-corporate form of central-planning capitalism that is no longer functioning.
If there is one reality that is denied or obscured by the Status Quo, it is that the economy no longer works as it did in the past. This is the fundamental economic context of our current slide into political-social disintegration.
The Status Quo narrative is: the policies that worked for the past 70 years are still working today. Boiled down to its Keynesian state-corporate essence, the Status Quo economic narrative is simple:
All we need to do to escape a "soft patch" (recession) is for governments to borrow and spend more money to temporarily boost incomes and demand until the private sector gets back on its feet and starts borrowing and spending more.
To help the private sector, central banks lower interest rates so it's cheaper to borrow and spend.
As soon as the private-sector borrowing and spending rises, we can raise interest rates and trim state fiscal stimulus (i.e. governments borrowing and spending trillions more than they did before the recession).
But the inconvenient reality is these Keynesian policies no longer work. Fiscal stimulus (governments borrowing and spending trillions more than they did before the recession) has continued for a decade--or in Japan's case, almost three decades.
The Keynesian gods have failed, but the worshippers of these false idols have no other form of black magic to turn to.
Why is fiscal stimulus now a permanent policy? The answer is uncomfortable: if fiscal stimulus is withdrawn (or even trimmed), the economy immediately goes into a self-reinforcing contraction.
As for near-zero interest rates: after 10 years of supposed "recovery," central banks are terrified of pushing rates higher by quarter-point baby-steps, for the same reason that fiscal stimulus cannot be withdrawn: raising interest rates to historic norms would immediately send the economy into contraction.
So "emergency" temporary measures are now permanent life-support, lest the comatose patient expire once life support is removed. If unprecedented "emergency" measures are now permanent props required to keep stagnation from imploding into depression, then what policies are left to deal with the next (inevitable) downturn?
The problem with zero-interest rate policy (ZIRP) and fiscal stimulus is neither are remotely connected to real wealth creation, i.e. increased productivity.Printing  /borrowing more money into existence does not create wealth; all the new money only increases future claims on existing productive assets.
Real wealth is generated by increasing the output of goods and services with fewer assets, less energy and less labor.
Corporations have foregone investment in favor of stock buy-backs. Much of the borrowed money has gone into unproductive housing and other asset bubbles.
As Gail Tverberg has explained, there is a collar on oil prices: if they're too low, producers lose money and shut down higher-cost wells, crimping supply; if they're too high, low and moderate-income households can no longer support the consumption the economy needs to keep expanding: Why We Should Be Concerned About Low Oil Prices (Our Finite World).
Cheap, abundant energy is required for expansion of borrowing, consumption and payrolls; as energy costs notch up, wages and consumption stagnate.
In effect, the conventional state/central bank policies reduce down to one simple directive: borrow from the future until "organic" (i.e. not dependent on state stimulus, self-sustaining) growth of the private sector returns.
But since productivity and average wages have declined, self-sustaining expansion is no longer the norm. Instead, every sector is borrowing from the future just to maintain the illusion of solvency and expansion. Corporations, states, central banks and households are all living off money borrowed from future earnings and taxes, or spending the gains from unsustainable asset bubbles.
The economy no longer works, and the Status Quo has no Plan B. All the Status Quo has is policies that no longer work: lowering interest rates (10 years and counting), fiscal stimulus (10 years and counting) and monetary easing/stimulus (10 years and counting).
We sense the economy is no longer working as it did in the past, but we're too terrified to even admit this. Since there's no conventional fix, our "leadership" acts as if everything is just fine, and authorities "adjust" measures of stagnation to appear healthy to support the illusion of solvency and expansion.
Productivity: stagnating, declining:
Personal income: stagnating, declining:
Federal debt (borrow and spend from future taxpayers)--through the roof:
Private-sector bank credit--through the roof:
Wealth inequality--through the roof:
There's no Plan B for a state-corporate form of central-planning capitalism that is no longer functioning. The only policies available are the "emergency" ones that are now permanent life-support systems of our failed global economies.


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.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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