The Endgame Of Financialization: Stealth Nationalization

Authored by Charles Hugh Smith via OfTwoMinds blog,

This is the new model of nationalization: central banks control the valuation of private-sector assets without actually having to own them lock, stock and barrel.

As you no doubt know, central banks don"t actually print money and toss it out of helicopters; they create a digital liability and use this new currency to buy assets such as bonds and stocks. Central banks have found that they can take control of the stock and bond markets by buying up as much as these markets as is necessary to force price and yield to do the central banks" bidding.

Central Banks Have Purchased $2 Trillion In Assets In 2017. This increases their combined asset purchases above $15 trillion. A trillion here, a trillion there, and pretty soon you"re talking real money--especially if you add in assets purchased by sovereign wealth funds, dark pools acting on behalf of monetary authorities, etc.

Gordon Long and I discuss this stealth nationalization in our latest video program, The Results of Financialization: "Nationalization" (35 min):

In the old model of nationalization, governments expropriated/seized privately owned assets lock, stock and barrel. When a central state nationalized an enterprise, it took total ownership of the asset.

In today"s globalized financial world, such crude expropriation is avoided for two reasons:

1. The entire point of the dominant neoliberal / neofeudal /neocolonial model is to maintain private ownership as a means of transferring the wealth to the New Aristocracy, i.e. the financier class. Government ownership certainly conveys benefits to the some are more equal than others functionaries atop the state"s wealth-power pyramid, but it doesn"t transfer the assets" income streams to private hands.

2. It sends the wrong message: central banks want private investors to do their bidding, i.e. to go along with the transfer of wealth and income from the many to the few (the New Aristocracy). Maintaining the system of private ownership enables the central banks to control the markets for these assets at the modest cost of a few handfuls of the loot being distributed to the small-fry owners of IRAs, 401K retirement accounts, etc.

In other words, what central banks want is not outright ownership, which is costly and troublesome; what central banks want is to control the markets on the cheap, with leveraged buying. In effect, central banks have been able to manage assets worth $150 trillion with a mere $15 trillion in well-timed (and loudly announced) asset purchases.

This is the new model of nationalization: central banks control the valuation of private-sector assets without actually having to own them lock, stock and barrel. Being the buyer of last resort--the Plunge Protection Team that buys every dip in whatever size is needed to stabilize valuations and then reverse the downturn into yet another rally to new highs--has worked for nine long years.

This success has bred a complacent faith in the central bank cargo-cult that there is no limit to central bank control of yields, valuations and market sentiment.

But as I"ve described here many times, financialization is a box canyon. Once you start down the path to the Dark Side of phantom wealth created by commoditized debt and leverage (i.e. financialization), there"s no turning back to the real world.

The central bank aircraft is flying into a canyon with walls 2,000 feet high at an altitude of 300 feet. Everything seems to be going splendidly until the central bank aircraft rounds a bend in the canyon and discovers the canyon ends in a rock face 2,000 high.

In a desperate attempt to escape the box canyon, central banks will ramp up their assets purchases of bonds to keep yields near zero, and of stocks to keep the bubble valuations high enough to support all the debt and leverage that"s been piled on the underlying collateral of the stock market: non-phantom net earnings.

Needless to say, attempting to control global markets via the issuance of trillions in new currency and using that currency to buy huge chunks of the stock and bond markets is an unprecedented experiment.

To continue the box canyon analogy: central bankers and their cargo-cult faithful are confident central banks are flying an F-18 with afterburners on max; climbing 1,700 feet in a near-vertical ascent should be no problem.

Those of us outside the cargo cult see the central bankers flying a Wright Flyer: innovative in its time, but inadequate to the task of controlling private-sector markets via stealth nationalization.

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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.

Financialization & The Destruction Of The Real Economy

Authored by Charles Hugh Smith via OfTwoMinds blog,

Strip an economy of capital, productive incentives, talent and yes, ethics, and what are we left with? An economy spiraling toward an inevitable collapse.

Financialization is destroying the real economy, but few in power seem to notice or care. The reason why is painfully obvious: those in power are reaping vast fortunes from the engines of financialization--for example, former President Obama: Obama Goes From White House to Wall Street in Less Than One Year.

This is not to single out President Obama as a special case; politicos across the spectrum depend on the engines of financialization to fund their campaigns and make them multi-millionaires, and corporate managers and financiers have skimmed billions of dollars in gains not from producing new, better and more affordable goods and services but by playing financialization games such as borrowing billions to buy back stocks, leveraged buyouts, and so on--all of which have reaped the insiders gargantuan fortunes while hollowing out the real economy.

Financialization necessarily hollows out the real economy, as Gordon Long and I detail in this new video program: The Results of Financialization - Part I (34 minutes)

The key dynamic is that financialization creates irresistible incentives to ramp up debt and leverage at the expense of the real economy. Those who fail to exploit financialization will underperform the market and be fired.

As Gordon explains, if a CEO refuses to load a company up with debt, a private-equity financier with access to cheap Federal Reserve credit will scoop up the company in a private buyout, fire the management, extract immense profits by loading the company with debt, then take the hollowed-out shell public again, reaping another windfall of financialized gains.

Note that the private-equity financiers have every incentive to lay off employees, especially experienced workers who earn higher salaries, to reduce costs before they take the hollowed-out shell public.

How can corporations pay out more to shareholders than they actually earned? Easy--financialization.

Another key dynamic in financialization is limitless liquidity and super low interest rates set by central banks--rates that are so low and liquidity so abundant that corporations can roll over their debt and actually add more debt and keep their interest payments unchanged.

This dynamic inevitably leads to zombie corporations--corporations with low rates of growth and profitability and high debt loads that in an unfinancialized economy would be recognized as insolvent and liquidated.

As we explain, financialization skews the risk-reward in favor of financial games, so real-world investments no longer make sense. Why risk building a factory in the U.S. or training workers when the pay-off is uncertain, when there are so many ways to reap immense fortunes via financial games that are ultimately backstopped by the Federal Reserve or federal agencies (i.e. the taxpayers)?

As many observers have noted, these perverse incentives have siphoned human talent away from productive employment and into enormously well-compensated but parasitic, exploitive financialization-related jobs.

Strip an economy of capital, productive incentives, talent and yes, ethics, and what are we left with? An economy spiraling toward an inevitable collapse. The metaphor I"ve used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up, but the central banks no longer allow any creative destruction of unpayable debt and mis-allocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.

As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.

The only possible output of this suppression is an economy piled high with explosive risk. Eventually Nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.

The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009)

The Financial Markets Now Control Everything (April 29, 2015)

I explain all this in greater detail in my short book Why Our Status Quo Failed and Is Beyond Reform.

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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.

The Real Reason Wages Have Stagnated: Our Economy Is Optimized For Financialization

Authored by Charles Hugh Smith via OfTwoMinds blog,

Labor"s share of the national income is in freefall as a direct result of the optimization of financialization.

The Achilles Heel of our socio-economic system is the secular stagnation of earned income, i.e. wages and salaries. Stagnating wages undermine every aspect of our economy: consumption, credit, taxation and perhaps most importantly, the unspoken social contract that the benefits of productivity and increasing wealth will be distributed widely, if not fairly.

This chart shows that labor"s declining share of the national income is not a recent problem, but a 45-year trend: despite occasional counter-trend blips, labor (that is, earnings from labor/ employment) has seen its share of the economy plummet regardless of the political or economic environment.

Given the gravity of the consequences of this trend, mainstream economists have been struggling to explain it, as a means of eventually reversing it. The explanations include automation, globalization/ offshoring, the high cost of housing, a decline of corporate competition (i.e. the dominance of cartels and quasi-monopolies), a failure of our educational complex to keep pace, stagnating gains in productivity, and so on.

Each of these dynamics may well exacerbate the trend, but they all dodge the dominant driver of wage stagnation and rise income-wealth inequality: our economy is optimized for financialization, not labor/earned income.

What does our economy is optimized for financialization mean? It means that capital and profits flow to the scarcities created by asymmetric access to information, leverage and cheap credit--the engines of financialization.

Optimization is a complex overlay of dynamically linked systems: the central bank optimizes the flow of cheap credit to the banking/financial sector, the central state tacitly approves the consolidation of cartels and quasi-monopolies, and gives monstrous tax breaks to corporations even as it jacks up taxes and fees on wage earners and small business.

Financialization funnels the economy"s rewards to those with access to opaque financial processes and information flows, cheap central bank credit and private banking leverage. Together, these enable financiers and corporations to get the borrowed capital needed to acquire and consolidate the productive assets of the economy, and commoditize those productive assets, i.e. turn them into financial instruments that can be bought and sold on the global marketplace.

These commoditized assets include home mortgages, student loans, and specialized labor forces which are "sold" with their employers or arbitraged globally. Once an asset is commoditized, the profits flow to those who process the transactions of packaging and marketing these assets globally.

Take auto loans as an example: the big money isn"t made from collecting the interest on the auto loans; the big money is made by processing and assembling the loans into tranches that can be sold to investors globally.

One way of understanding financialization is to ask: what"s the quickest, easiest way to make $10 million in our economy? Is it building a business based on the labor of employees over a decade or two?

You"re joking, right? The easiest way to make $10 million is to be part of the investment banking team overseeing a $10 billion corporate buyout or merger deal, or investing seed money in a tech company that subsequently goes public.

How about the easiest and quickest way to make $100 million? The answer is the same: working a vein of financial wealth based on commoditized instruments, leverage and credit.

Labor"s share of the national income is in freefall as a direct result of the optimization of financialization. The money flows to those with the capital, credit and expertise to optimize financialized skims. As for selling one"s labor in an economy optimized for capital and the asymmetries of finance--there"s no premium for labor in such an economy, other than technical/managerial skills required by finance to exploit markets.

This is the driver of the rising income-wealth inequality this chart reveals:

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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.

The Toxic Fruit Of Financialization: Risk Is For Those At The Bottom

Authored by Charles Hugh Smith via OfTwoMinds blog,

Those who have pushed the risk down the wealth-power pyramid are confident the Federal Reserve will continue to limit the risks of speculative financialization.

One of the most pernicious consequences of financialization is the shifting of risk from the top of the wealth-power pyramid to the bottom: those who benefit the most from financialization"s leveraged, speculative credit bubbles protect themselves from losses while those at the bottom of the pyramid (the bottom 99.5%) face the full fury of financialization"s formidable risk.

Longtime correspondent Chad D. and I recently exchanged emails exploring how the higher debt loads and higher interest payments of financialization inhibits people at the bottom of the wealth-power pyramid (i.e. debt-serfs) from taking risks such as starting a small business.

But this is only one serving of financialization"s toxic banquet of risk-related consequences. Chad summarized how those at the apex of the wealth-power pyramid protect themselves from risk and losses.

At the top levels of the pyramid, members in those groups collect way more interest than they pay out and at the very top, they get a ton of interest and pay little to none. The people at the top can take all sorts of risk, because of this dynamic and further, they also usually have a heavy influence on the financial/political machinery, so they get bailed out by taxpayers when their investments go bad. In addition, because their influence extends to the criminal justice system, they are able to commit fraud and at the same time neutralize regulators and prosecutors, thereby escaping any ramifications from their excessive risk taking and in many cases massive fraud.

As Chad observed, the wealthy own the income streams from debt (bonds, etc.), while everyone else owes the interest and principal due on debt. As this chart shows, the wealthy own business equity and financial securities and have a modest slice of debt. The bottom 90% owe most of the debt, and their primary asset is the family home-- an asset that doesn"t generate income while it generates interest income for those who own the mortgage. In other words, it"s less an investment than a form of consumption-- especially when the current housing bubble deflates.

The asymmetry of risk and exposure to loss resulting from financialization is about to become consequential. Financialization has reached the top of the S-curve and is now in the decline phase. As noted on this graph, what worked so effortlessly in the boost phase of financialization not only no longer works, it actively boosts the risks of sudden, catastrophic losses.

Those who have pushed the risk down the wealth-power pyramid are confident the Federal Reserve will continue to limit the risks of speculative financialization. The S-curve is a pattern of Nature. If you"re confident the Fed is now the ultimate power in the Universe, then you"re betting that the Fed and Treasury will always absorb all the risk and all the losses, with zero consequences.

The S-Curve suggests that bet isn"t as low-risk as those at the top of the wealth-power pyramid currently believe.

The Death Spiral Of Financialization

Authored by Charles Hugh Smith via OfTwoMinds blog,

Each new policy destroys another level of prudent fiscal/financial discipline.

The primary driver of our economy--financialization--is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.

Financial "wealth" created by leveraging more debt on a base of real-world collateral that doesn"t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.

As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.

The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.

These extremes don"t just pile up like bricks--they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.

This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.

Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to Financialization. Each "fix" that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy"s credit-business cycle.

Each new policy destroys another level of prudent fiscal/financial discipline.

The discipline of sound money? Gone.

The discipline of limited leverage? Gone.

The discipline of prudent lending? Gone.

The discipline of mark-to-market discovery of the price of collateral? Gone.

The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.

The discipline of open-market interest rates? Gone.

The discipline of losses being absorbed by those who generated the loans? Gone.

And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation"s seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.

We"re In A Boiling-Point Crisis Of Exploitive Elites

Authored by Charles Hugh Smith via OfTwoMinds blog,

The "fixes" to the stagnation of postwar Capitalism in the 1970s were financialization, globalism, and the sustained expansion of debt--all have run out of steam.

Many of us have written about cycles in the past decade: Kondratieff economic cycles, business/credit cycles, the Strauss–Howe generational theory (an existential national crisis arises every four generations, as described in their book The Fourth Turning), and long-wave cycles of growth and decline, as described in seminal books such as The Great Wave: Price Revolutions and the Rhythm of History and War and Peace and War: The Rise and Fall of Empires.

There is another Rhythm of American History that few recognize: the economic, social and political crises sparked by exploitive Elites. There are two dynamics that drive these crises:

1. The exploitation of commoners by financial/political Elites reaches extremes that create systemic instability as commoners no longer have the means to improve their conditions.

 

2. The economic mode of production that generated Elite wealth no longer functions, but the Elites cling to the failing system and enforce it with increasingly violent suppression of dissent.

Here are the previous Crises of Exploitive Elites:

1. Slavery, 1850 to 1865. Though the toxins generated by slavery are still with us, the existential political, social and economic crisis arose in the years between 1850 and the end of the Civil War in 1865.

In broad brush, the rise of the American West triggered a political crisis in the U.S. as the southern states realized the non-slave West"s rising political power would doom the fragile balance between the non-slave Northern industrial-economy states and the cotton/agricultural slave-economy South.

It was a trend the South couldn"t possibly win, but the South"s exploitive Elites refused to concede any of their power--and that refusal to adapt to changing conditions guaranteed the Civil War.

The first Industrial Revolution radically transformed the source of wealth creation. The plantation agrarian mode of production of the South was eclipsed by the vast wealth-generating might of the rapidly industrializing North.

The Southern political and economic Elites could not win economically or politically, so they attempted a military solution--a war they might have won had it not been for the Westerners Lincoln, Grant and Sherman. (Lincoln was born and raised in the frontiers of Kentucky, Indiana and Illinois; both Grant and Sherman were born in Ohio and served in Army postings along the West Coast.)

The moral tide was rising against slavery. The Christian world had long been divided on the issue of slavery, but the tide turned against slavery in the early-to-mid-1800s, both in Great Britain an the U.S. Moral turnings are powerful instigators of political crises, and once again the Southern Elites attempted to stem this tide with military force.

2. The Crisis of Gilded-Age Exploitation, 1892 to 1914. The dates of this crisis are inexact and open to interpretation, but in broad brush, the Second Industrial Revolution (mass production, integrated industrial corporations, the rising dominance of Finance and Industrial Capital, emergence of monopolies and cartels, etc.) forced millions of commoners into the penury of wage-labor while concentrating the gains of capital and speculation into the hands of the few.

Adjusted for inflation, the wealth of the financier-industrialists in this era exceeds the wealth of today"s billionaires, and is on par with the extremes of wealth concentration that characterize the last stages of the Roman Empire.

Commoners attempting to unionize were brutally suppressed by hired private enforcers and the police/military forces of the American government. Radical unions such as the I.W.W. (Industrial Workers of the World, a.k.a. Wobblies) were destroyed by coordinated, concerted government suppression, much of it by means that are visibly illegal by today"s standards.

The conflict between exploited industrial labor and politically dominant Capital was eventually resolved by progressive anti-trust laws (aided by President Theodore Roosevelt) and the beginnings of social rights and welfare programs--universal education, limits on hours worked per week, etc.

3. The Great Depression and the Failure of Debt-Based Capitalism, 1929 to 1941. Capital was increasingly concentrated in the hands of the Elites in the Roaring 20s, but the commoners had new access to the financial magic of credit: banks sprouted by the thousands, anxious to loan money to fund the purchase of more farmland, new autos, and all the other output of a consumerist economy.

But alas, credit is not collateral, nor is it wealth. When the debt bubble burst, so did the stock market, which was based on highly leveraged margin debt.

The Elite financiers resisted writing down the debt that had made them so rich, and as a result the Depression dragged on, immiserating millions who then turned to fascism or radical socialism as the political fixes to the systemic exploitation and dominance of Elites.

4. Civil Rights and Global Empire, 1954 to 1973. The legacy of slavery"s oppression had lingered on for almost 100 years, and the rising prosperity of the 1950s and 60s generated a social, moral, political and economic movement to throw off the most oppressive aspects of an exploitive social/political order.

At the same time, the costs of maintaining a Global Empire were raised to a boiling point by the war in Vietnam, which destabilized the moral, political, social and economic orders.

In response the Elites instigated waves of violent, suppressive state tactics designed to disrupt and destroy the organized dissent of social movements. These tactics included the FBI"s COINTELPRO programs as well as other blatantly illegal, heavy-handed government enforcement of the dominance of exploitive Elites.

I"ve written extensively about state over-reach and illegal suppression of dissent: remember, the state exists to enforce the dominance of Elites: everything else is propaganda, misdirection and obfuscation.

Welcome to the United States of Orwell, Part 3: We had to Destroy Democracy in Order to Save It (March 28, 2012)

State Over-Reach: Stripmining the Citizenry for Fun and Profit (November 13, 2009)

When It Becomes Serious, First They Lie--When That Fails, They Arrest You (March 16, 2015)

For more on COINTELPRO, please read War at Home: Covert action against U.S. activists and what we can do about it.

Simply put: when lies no longer work, the government devotes its resources not to eliminating wars of choice, cronyism and corruption but to suppressing dissent and resistance to those extractive, exploitive policies.

Which brings us to the present-day Crisis of Exploitive Elites. The "fixes" to the stagnation of postwar Elite/state-dominated Capitalism in the 1970s were financialization, globalism, and the sustained expansion of debt in all sectors--state, corporate and household.

Now all three engines of "growth" have run out of steam. All three greatly exacerbated wealth and income inequality, as these two charts reveal:

Once again, the political and economic Elites are resisting the tides that are undermining their Empires of Debt and Exploitation. The Elite-controlled Corporate Media has been ordered to War Status, an DefCon-5 emergency requiring an endless spew of all-out propaganda designed to distract, disrupt and destroy organized dissent and any resistance to the dominance of Exploitive political and financial Elites.

The Exploitive Elites cannot turn back the clock, so they cling to their failed "fixes" and demand our compliance.

The Exploitive Elites cannot turn back the tides of history, but they can immiserate millions. That seems to be "solution" enough for them, but you cannot destroy rising moral revulsion to soaring inequality and the abject failure of debt-based global capitalism with mere media propaganda.

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Of related interest:

Coming Apart: The Imperial City At The Brink

The U.S. Is Where the Rich Are the Richest

The Pin To Pop This Mother Of All Bubbles?

"Nobody In Power Is Paying Attention To How Close We Are To The Edge"

Authored by Howard Kunstler via Kunstler.com,

As our politicos creep deeper into a legalistic wilderness hunting for phantoms of Russian collusion, nobody pays attention to the most dangerous force in American life: the unraveling financialization of the economy.

Financialization is what happens when the people-in-charge “create” colossal sums of “money” out of nothing — by issuing loans, a.k.a. debt — and then cream off stupendous profits from the asset bubbles, interest rate arbitrages, and other opportunities for swindling that the artificial wealth presents. It was a kind of magic trick that produced monuments of concentrated personal wealth for a few and left the rest of the population drowning in obligations from a stolen future. The future is now upon us.

Financialization expressed itself in other interesting ways, for instance the amazing renovation of New York City (Brooklyn especially). It didn’t happen just because Generation X was repulsed by the boring suburbs it grew up in and longed for a life of artisanal cocktails. It happened because financialization concentrated immense wealth geographically in the very few places where its activities took place — not just New York but San Francisco, Washington, and Boston — and could support luxuries like craft food and brews.

Quite a bit of that wealth was extracted from asset-stripping the rest of America where financialization was absent, kind of a national distress sale of the fly-over places and the people in them. That dynamic, of course, produced the phenomenon of President Donald Trump, the distilled essence of all the economic distress “out there” and the rage it entailed. The people of Ohio, Indiana, and Wisconsin were left holding a big bag of nothing and they certainly noticed what had been done to them, though they had no idea what to do about it, except maybe try to escape the moment-by-moment pain of their ruined lives with powerful drugs.

And then, a champion presented himself, and promised to bring back the dimly remembered wonder years of post-war well-being — even though the world had changed utterly — and the poor suckers fell for it. Not to mention the fact that his opponent — the avaricious Hillary, with her hundreds of millions in ill-gotten wealth — was a very avatar of the financialization that had turned their lives to shit. And then the woman called them “a basket of deplorables” for noticing what had happened to them.

And now the rather pathetic false promises of President Trump, the whole MAGA thing, is unraveling at exactly the same time that the financialized economy is entering its moment of final catastrophic phase-change. The monuments to wealth — especially the stock and bond portfolios and the presumed value of real estate investments — will surrender to a process you might call price-discovery-from-Hell, revealing their worth to be somewhere between little and nothing. The accumulated monstrous debts of persons, corporations, and sovereign societies, will be suddenly, shockingly, absolutely, and self-evidently unpayable, and the securities represented by them will be sucked into the kind of vortices of time/space depicted in movies about mummies and astronauts. And all of a sudden the avatars of that wealth will see their lives turn to shit just like moiling, Budweiser-gulping, oxycontin-addled deplorables in the flat, boring, parking lot wastelands of our ruined drive-in Utopia saw their lives rendered into a brown-and-yellow slurry draining clockwise down the toilet of history.

Nobody in power in this country is paying attention to how close we are to that epic moment — at least, they’re not talking about it. If the possibility of all that even occupies some remote corner of their brains, they surely don’t know how to prepare the citizenry for it, or what to do about it. The truth is that societies respond emergently to major crises like the imminent unraveling of our financialized economy, often in disorderly and surprising ways. I suppose we’ll just have to watch the nauseating spectacle play out, and in the meantime enjoy the Russian collusion melodrama for whatever it’s worth — probably more than a ticket to Wonder Woman or the new Tom Cruise Mummy movie.

Marx, Orwell, And State-Cartel Socialism

Authored by Charles Hugh-Smith via OfTwoMinds blog,

When "socialist" states have to impose finance-capital extremes that even exceed the financialization of nominally capitalist economies, it gives the lie to their claims of "socialism."

OK, so our collective eyes start glazing over when we see Marx and Orwell in the subject line, but refill your beverage and stay with me on this. We"re going to explore the premise that what"s called "socialism"--yes, Scandinavian-style socialism and its variants--is really nothing more than finance-capital state-cartel elitism that has done a better job of co-opting its debt-serfs than its state-cartel "capitalist" cronies.

We have to start with the question "what is socialism"? The standard definition is: a political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.

In practice, the community as a whole is the state. Either the state owns a controlling interest in the enterprise, or it controls the surplus (profits), labor rules, etc. via taxation and regulation.

The problem with equating the community with the state is the community is a completely different order from the centralized state, which is operated and controlled by a self-serving clerisy class that institutionalizes benefiting the few at the expense of the many.

The more accurate definition of socialism is: the means of production are owned and controlled by those who produce the goods and services.

Marx wrote a great many things in his career, and those who view his writings as scripture will argue endlessly over various interpretations and passages, much like people argue over the Bible.

In my view, Marx was a political-economy philosopher, not a demi-god, and so he retained the right to be completely wrong about some things, to contradict himself, to have missed important second-order effects, to have gotten some things half-right, etc., and most importantly, not to have been clairvoyant about the trajectory of history and capitalism, which he correctly identified as disruptively dynamic, i.e. everything solid melts into air.

One of the things Marx got right was the alienation of the producer/ worker from the output of his/her labor. The alienation is not just a loss of ownership; it"s also a loss of agency and a psychological alienation from the entire mode of production.

The workers" alienation from the output of their labor doesn"t vanish just because the state owns the means of production; rather, the "capitalist" elite is replaced by a political elite and a state-clerisy managerial class.

"Socialism" is simply another flavor of state-cartel capitalism; Orwell would be proud of all the simulacrum self-serving "socialists" who have managed to enrich themselves at the expense of those actually producing goods and services.

Calling state-cartel finance-capitalism "socialism" doesn"t make it socialist. Orwellian double-speak doesn"t change the neofeudal nature of debt-based state-cartel finance-capitalism.

Let"s boil it down to its essence: if the producers don"t directly own/control the output of their labor, it"s capitalism, not socialism. State ownership/ control is nothing but the state-cartel coin turned over.

The only truly socialist system would be comprised of worker-owned collectives and co-ops, and privately owned and operated small enterprises.

In a truly socialist system, global corporations would pay such high entry fees and taxes that they could not compete on price against local worker-owned collectives/ co-ops.

In a truly socialist system, state functionaries would be banned from accepting bribes, campaign contributions, seats on philantro-capitalist foundations, corporations, etc., and barred from taking jobs in corporations after leaving state employment.

In state-cartel economies, "socialist" or otherwise, the system optimizes corporate profits, influence and agency. In a truly socialist system, worker-owned collectives/ co-ops and small business are optimized and corporations are de-optimized.

The only way state-cartel "socialist" economies can prop up their vast spending is by inflating even vaster debt and housing bubbles via financialization-- the exact same mechanism used in so-called "capitalist" economies to benefit the few at the expense of the many.

So-called "socialist" nations from China to Scandinavia are inflating monumental bubbles of debt to keep their delusions of sustainability aloft. I have covered China"s unprecedented expansion of debt many times; Acting Man does an admirable job of covering Scandinavian Bubbles in Overdrive.

Worker-owned and controlled enterprises don"t need to inflate-monopoly-capital financialization bubbles to stay afloat. Only state-cartel elite-run systems need to exploit financialization to keep from imploding.

Danish household debt to GDP is among the highest in the world: what"s "socialist" about debt bubbles?

"Socialist" countries like Denmark are practicing extreme financial repression: what is "socialist" about negative interest rates?

Why does "socialist" Sweden need to inflate one of the world"s most precarious housing bubbles? If "socialism" requires extremes of financialization to stay afloat-- sorry folks, it isn"t socialism.

Here"s Norway"s M2 money supply. What"s remotely "socialist" about this staggering increase in elite-controlled money supply?

Last but not least, here"s SOE (state-owned enterprises) "socialist" China"s debt to GDP ratio.

As Marx anticipated, finance-capital would come to dominate industrial capital and the state. What we see in these charts is finance-capital running to extremes to keep the state-cartel version of capitalism from imploding.

When "socialist" states have to impose finance-capital extremes that even exceed the financialization of nominally capitalist economies, it gives the lie to their claims of "socialism." The simulacrum "socialist" economies will implode with even greater force than the nominally capitalist economies, as a result of the same dynamic: state-cartel financialization is intrinsically unstable and unsustainable.

Financialization & The Erosion Of Growth

Authored by Ben Masters via RealInvestmentAdvice.com,

One of the common side effects of debt-fueled speculation/spending is financialization, and one should immediately look to the growth and prominence of the financial industry (since the 1980s) with alarm, hesitation and concern; how and why is it that an industry that produces no physical product has grown to its current size?  After all, the financial industry exists as a non-production-utility — its very purpose is to properly allocate capital and resources to desirable (in-demand) industries; it’s an industry whose very existence relies on the success of other industries. If the financial industry is able to properly allocate capital/resources to desirable industries, it’s rewarded and is able to grow along with those other fundamental industries; and if a misallocation occurs, capital/resources are allocated to (and used up by) unsuccessful industries — those industries then shrink, along with the finance industry and economic growth.

The concern then is that if a general “hollowing out” of production occurs in a country — something that is rarely disputed these days when addressing U.S. industry — this would typically result in a smaller financial industry, not a larger one; yet the explosion of growth in the finance industry since the 1980s has been in stark contrast.  Why is this?  Put simply, debt-fueled investment speculation and debt-based spending has exploded since the 1980s.

Debt-fueled investment speculation can be seen in this visual of the three instances of the 21st century where long-term returns for stocks have been reduced — each peak fueled by different forms of speculation that ensure low future returns:

Tradable securities far outpacing economic growth…

The three speculative episodes of the 21st century, and dangerous transition periods…

Each of these speculative episodes have been addressed in The Orchestration of Debt-Based Expansions; and the topic of debt-based spending (pursued since the 1980s) has been written about as well, and includes government debt and consumer debt (mortgages, credit cards, student loans, car loans, borrowing to supplement falling incomes, etc.): see Debt Levels, Why does college cost so much?, Why doesn’t anyone earn anything in a bank account anymore?, and Income Stagnation.

The dilemma is that debt temporarily inflates the price of desirable assets (until the point in time where that debt needs to be paid back), and if a majority of the economy has debt that needs to be paid back economic growth is constrained — at some point in time those individuals are paying back loans instead of boosting economic growth through spending.  And if the majority of the economy has unproductive debt (debt that has not created an income stream to repay the principal amount borrowed and interest on the debt) then defaults, write-downs, etc. have a punishing affect on the economy and financial system.

For many, that punishing affect is a destruction of investments (which are not the same as wealth… see Fundamental Wealth).  Their “assets” evaporate, prices plunge, and they don’t know why…  The reason that assets vanish in a market crisis is because debt is always considered an asset by the issuer, yet in reality debt isn’t always an asset for the issuer; there are improper claims of assets — assets that don’t exist (loans that won’t be able to be paid back).  In effect, there are claims of assets (and securities issued on those “assets”) that outnumber the actual underlying assets.

It’s the financialization due to debt/leverage/speculation — the adding of layers and complexities — that can lead to a weakening of the market structure; one need only look to Charles Kindleberger’s work Manias, Panics, and Crashes to see how this process has unfolded over and over throughout history.

“Speculative manias gather speed through expansion of money and credit. . .there are many more economic expansions than there are manias.  But every mania has been associated with the expansion of credit.  In the last hundred or so years the expansion of credit has been almost exclusively through the banks and the financial system.

In boom, entropy in regulation and supervision builds up danger spots that burst into view when the boom levels off.” – Charles Kindleberger

And so financialization — the prominence of the finance industry and the growing dominance of obscure types of investments (many of which are simply more expensive packages of existing investments) — is made plain and clear: since the 1980s, it has grown due to temporary debt-based investment speculation and debt-based spending.  And although financialization is temporary (debt constraints eventually cause a readjustment), the real danger is that the temporary misallocation-of-wealth that occurs rewards the financial industry in a boom/bust cycle; wealth and capital that would have been used in other in-demand industries (had productive debt been pursued) is instead concentrated and used up in the financial industry, and when coupled with the ability to influence politics this temporary reward/misallocation can cause a further entrenchment of the undeservedly rewarded industry — a further misallocation of wealth.

Said in 2009 by Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, & Van Otterloo — one of the largest investment companies in the world…

“I’d like to challenge the usefulness — not just of new instruments — but of large tracts of the whole financial industry, much of which is a net drag.  Let’s start with the investment management business, because I think intuitively, obviously, you can see that we collectively add nothing.  We produce no “widgets”, we shuffle the existing value of all corporations and bonds around, in a cosmic poker game.  At the end of each year, the investment community is down by one percent (cough)…the individual is down by two, and aggregate fees have steadily grown.  As we grew by ten times from ’89 to ’99 huge economies of scale were existing, but the fees-per-dollar-managed grows — no fee competition at all, contrary to theory.  Why?  Agency problems, asymmetry of information, the client can’t tell talent from luck or risk taking, and as we add new products (options, futures, CDOs, hedge funds, private equity) aggregate fees rise as a percentage of assets; there becomes a layer of fees and another layer of agents and fees — the more complicated and opaque, the more the client need us. . .

As fees go up by half-a-percent, we reach into the client’s balance sheet, snatch the half-a-percent, and turn it into income; it’s almost magic — capital into income… but we lower the savings rate of our clients (savings and investment rate) by half-a-percent as our fees go up, so we get short term GDP kick from our income, at the expense of lower long-term growth on the part of the system.  Similarly with the whole financial system… let us say by 1965 (the best decade we ever had, the ’60s) there was a very financial financial-service arrangement — enough banking, enough letters of credit, to get the job done. 

Adequate tools are vital — that’s not the issue.  We’re talking the razzmatazz of the last ten or fifteen years…  The financial system was 3% of GDP in 1965 — it’s now 7 1/2; this is an extra 4% load that the real economy carries.  The financial system overfeeds and slows down the real economy.  The first hundred years, up to 1965, the economy was like a battleship, growing at 3.5% a year.  Even the great depression bounced off it.  After 1965 the GDP (ex-financials) grew at 3.2; after 1982, at 3.1; after 2000, at 2.3; all of these to the end of ’07 (not including the current problems).  From society’s point of view this 4% works like looting, or an earthquake — both increase GDP short term, but chew up capital.  They might as well be retirees or children — all these extra people in the financial business— but they are much, much more, expensive. 

Economists have not studied the optimal size for finance — indeed, a learned journal recently rejected a paper on the grounds that finance does not comment on social utility; that is perhaps why the risks are little. 

The underlying problem recently has been touching faith in capitalism, this faith was based on 50 years of a dominant economic theory that was shockingly not based on facts but on unestablished, unprovable, assumptions: “rational expectations” — this has given us efficient markets. So why regulate new instruments, if capitalism and markets are efficient?  Or why regulate anything?  So Greenspan, Rubens, Summers, and the SEC, happily beat back Brooksley Borne trying to regulate new instruments. But as Keynes knew in 1934, markets are behavioral jungles, racked by changing animal spirits, and by agency problems.  Efficient markets assume symmetry of data on all sides.  In real life, agents have all the data and the principal clients know little. It’s like taking candy from babies, the more opaque and complicated the new instruments, the easier the ripoff.  There is now — at LSE [London School of Economics] — a Centre for the Study of Capital Market Dysfunctionality, started by my former colleague, Paul Woolley, that is even now, attempting an academese, to establish that in the real world condition, agents in finance tend towards getting everything.”

- Jeremy Grantham, 5:33 mark of 2009 Buttonwood Gathering

Do The Roots Of Rising Inequality Go All The Way Back To The 1980s?

Authored by Charles Hugh-Smith via OfTwoMinds blog,

Unless we change the fundamental structure of the economy so that actually producing goods and services and hiring people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

I presented this chart of rising wealth inequality a number of times over the past year. Do you notice something peculiar about the inflection points in the 1980s?

Correspondent W.S. noted that the inflection point for the top .1% (late 1970s) preceded the inflection point of the bottom 90% (around 1986): both increased their share of household wealth from 1978 to 1986, and then the share of the top .1% took off, essentially tripling from 8% to over 22%, while the share of the bottom fell precipitously from 36% to 23%.

(Note that the data stops at 2012; if we extend the trends to the present, the lines have certainly crossed and the share of the .1% now exceeds that of the bottom 90%.)

So what happened between 1978 and 1986? The first phase of the financialization of the U.S. economy. What is financialization? In a financialized economy, speculating with highly leveraged debt and exotic financial instruments is far more profitable than producing goods and services.

Financialization hollows out the productive assets of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites" ownership of the government"s regulatory and legislative bodies.

Here is another less pungent description via Wikipedia: "Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics."

Here is my more formal definition:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

I describe the dynamics in What"s the Primary Cause of Wealth Inequality? Financialization (March 24, 2014)

Correspondent W.S. submitted commentary and references this 2005 book Financialization and the World Economy:

In the US "total credit market debt divided by GDP was about 1.5 from 1961 to 1981. It accelerated rapidly in the decade of the 1980s - from 1.6 in 1981 to 2.3 in 1989 - as the federal budget deficit soared, hostile takeovers and leveraged buyouts loaded corporations with debt, and household borrowing increased. Corporate and household borrowing raised indebtedness further in the 1990s; by 2001 the debt to GDP ratio was 2.8, almost double the ratio in the Golden Age. Moreover, average real interest rates have been much higher in the neoliberal era than they were in the three decades that preceeded it.

W.S. Also referenced FINANCIALIZATION OF THE ECONOMY and added this commentary:

While “bloated” conglomerates were linked by some to the sluggish performance of the American economy in the 1970s, for corporate raiders they presented a get rich quick opportunity via the “market for corporate control” (Manne 1965). Outsiders could buy the firm from its existing shareholders, fire its managers, and sell off the parts for a quick profit.

After the election of Ronald Reagan in 1980, this became possible on a grand scale due to relaxed antitrust guidelines, changes in state antitakeover laws, and financial innovations that enabled raiders to get relatively short-term financing on a large scale (Davis & Stout 1992). Within a decade, nearly one-third of the Fortune 500 largest industrial firms had been acquired or merged, often resulting in spinoffs of unrelated parts, and by 1990 American corporations were far less diversified than they had been a decade before (Davis et al 1994).

The other thing that happened in the mid-1980s was computer technology became cheap enough and powerful enough to start replacing human labor on a wider scale. Spreadsheets such as Excel became accessible to small business, and the desktop publishing combo of the Apple Macintosh and laserprinters revolutionized the cost structure of marketing.

The rise of the Internet (coupled with cheap memory and processing power) further fueled the productive expansion of digital technologies. As I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy, these tools-- which are now ubiquitous and inexpensive--enable one person today to equal the output of what once took four people to produce in the late 1980s.

In effect, labor entered an era of dynamic over-supply just as healthcare costs began to rise, making it more costly to hire workers. Some skills and trades remain scarce and thus well-paid, but as a generalization it became cheaper and more efficient to replace increasingly expensive human labor with increasingly inexpensive and powerful software and digital tools.

Unless we change the fundamental structure of the economy so that actually producing goods and services and maximizing opportunities for people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

Recent podcasts/video programs:

Deep State Fractures Under Populist Revolution (TruNews, 37:27)

Americans Refuge In "Matrix Of Rackets" Is Failing

Authored by Howard Kunstler via Kunstler.com,

You might not know it, given all the ambient noise of the moment, but beyond the torments of news and propaganda there is still something called the nation. It’s more than just a political compact. Until not long ago it was also a culture, an agreed-upon set of values, practices, and customs that amounted to an identity: I’m an American. If you canvassed the crowd in Yankee Stadium one summer afternoon in 1947, I imagine each person would answer that way rather than saying I’m a wounded war veteran, I’m a WASP, I’m an oppressed housewife, I’m a negro, I’m Italian, I’m a Jew, I’m a union member, I’m a communist, I’m queer, I’m a rape victim….

These days, the hardships of history are shattering the nation and our response politically has been to take refuge in a matrix of rackets. Most of these rackets are economic, because it’s the essence of racketeering to extract the greatest benefit possible from the object of your racket at the least cost to the racketeer. In plain English, it’s an organized way of getting something for nothing. The identity politics of our time is another form of racketeering — extracting current maximum benefits on claims of mistreatment, often bygone, specious, or only imagined.

And so one of the truly existential questions of the moment is whether we’ll continue to be a nation, even geographically, and a lot of sentient observers aren’t too sure. Apparently we’re not too sure we even want to be. This is why the campaign slogan of Hillary Clinton, “Stronger Together,” rang so false when the Democratic Party worked so diligently in 2016 to construct separate identity fortifications and then declared culture war on the dwindling majority outside the ramparts. And you’re surprised that Donald Trump won the election?

Trump won by making promises that he’ll never be able to keep under the current circumstances. The main promise was to restore the standard of living enjoyed in bygone decades by former industrial workers and clerks. His promise was based on a misunderstanding of history: the notion that the industrial organization of daily life was a permanent part of the human condition. You could detect by the early 21st century that this was not so anymore. That was exactly why we tried to replace it with an economy of rackets. When there’s nothing left, a lot of people are going to try to get something for nothing, because there’s nothing else to do.

Hence, the financialization of the economy. In the 1950s, finance made up about five percent of the economy. It’s mission then was pretty simple and straightforward: to manage the accumulated wealth of the nation (capital) and then allocate it to those who proposed to generate greater wealth via new productive activities, mostly industrial, ad infinitum. It turned out that ad infinitum doesn’t work in a world of finite resources — but the ride had been so intoxicating that we couldn’t bring ourselves to believe it, and still can’t.

With industry expiring, or moving elsewhere (also temporarily), we inflated finance to nearly 40 percent of the economy. The new financialization was, in effect, setting a matrix of rackets in motion. What had worked as capital management before was allowed to mutate into various forms of swindling and fraud — such as the bundling of dishonestly acquired mortgages into giant bonds and then selling them to pension funds desperate for “yield,” or the orgy of merger and acquisition in health care that turned hospitals into cash registers, or the revenue streams on derivative “plays” that amounted to bets with no possibility of ever being paid off, or the three-card-monte games of interest rate arbitrage played by central banks and their “primary dealer” concubines.

Some of what I’ve listed above may be incomprehensible to the blog reader, and that is because these rackets were crafted to be opaque and recondite. The rackets continue without regulation or prosecution because there is an unstated appreciation in government, and in the corporate board rooms, that it’s all we’ve got left. What remains of the accustomed standard of living in America is supported by wishing and fakery and all that is now coming to a climax as we steam full speed ahead into Murphy’s law: if something can go wrong, it will.

When all of America comes to realize that President Trump doesn’t know what he’s doing, it will make last November’s national nervous breakdown look like a momentary case of the vapors. What can go wrong awaits in markets, banks, currencies, and the immense dark pools of counterparty obligations that amount to black holes where notions of value are sucked out of the universe. There is so much that can go wrong. And then it will. And then maybe that will prompt us back to consider  being a nation again.