Paul Craig Roberts Exposes "Plunder Capitalism"

Authored by Paul Craig Roberts,

I deplore the tax cut that has passed Congress. It is not an economic policy tax cut, and it has nothing whatsoever to do with supply-side economics. The entire purpose is to raise equity prices by providing equity owners with more capital gains and dividends.

In other words, it is legislation that makes equity owners richer, thus further polarizing society into a vast arena of poverty and near-poverty and the One Percent, or more precisely a fraction of the One Percent wallowing in billions of dollars. Unless our rulers can continue to control the explanations, the tax cut edges us closer to revolution resulting from complete distrust of government.

The current tax legislation drops the corporate tax rate to 20%. This means that global corporations registered in the US will be taxed at a lower income tax rate than a licensed practical nurse making $50,000 per year. The nurse, if single, faces in 2017 a 25% marginal tax rate on all income over $37,950.

A single person is taxed at a rate of 33% on all income above $191,651. 33% was the top tax rate extracted from medieval serfs, and approaches the tax rate on US 19th century slaves. Such an upper middle class income as $191,651 sounds extraordinary to most Americans, but it is so far from the multi-million dollar annual incomes of the rich as to be invisible. In America, it is the shrinking middle and upper middle class incomes that bear the burden of income taxation. The rich with their capital gains from their equity holdings are taxed at 15%.

Even single individuals who earn between $1 and $9,325 are taxed at 10% on their pittance.

The neoliberal economists who are the shills for the rich, Wall Street, and the Banks-Too-Big-Too-Fail claim, erroneously, that by cutting the corporate income tax rate to 20% all sorts of offshored profits will be brought back to the US and lead to a booming economy and higher wages.

This is absolute total nonsense. The money won’t come back, because it is invested abroad where labor costs are lower, if invested at all instead of buying back the corporation’s stock or buying other existing companies. After 20 years of offshoring US manufacturing and professional tradable skills and the incomes associated with the jobs, who is going to invest in America? The American population has no income with which to purchase the goods and services from new investment, and the American population’s credit cards are maxed out.

All that is going to happen is that Wall Street will calculate the lower tax rate into a higher equity price. Wall Street can do this without any of the offshored earnings coming home. Suddenly, everyone who owns equities will experience a boost in wealth, or the boost has already occurred in anticipation of the handout.

The deficit-conscious Republicans have put into the Bill for Enhancement of the Rich’s Wealth, cuts in social services in order to “save workers from higher interest rates from budget deficits.” This is more dishonesty. If the Fed lets real interest rates rise to any meaningful amount, derivatives will unwind, and the Fed will have to create trillions more in new dollars to keep its ponzi scheme in place. The deficit that results from the tax cut will be covered by the Fed purchasing the Treasuries, not by a rise in interest rates.

What we are witnessing in the US and indeed throughout the western world is the total failure of capitalism. Capitalism is now merely a looting machine. The financial sector no longer supplies capital for production. What the financial sector does is to turn discretionary consumer income into interest and fee payments to banks. Aggregate demand can only grow through debt expansion, and the consumers reach a point where they cannot expand their debt.

Capitalism, hiding behind “globalism,” which is misrepresented as a good thing when it is death itself, locates production where labor is cheapest, thus depriving First World labor of good wages and work opportunities and putting First World countries on the path to becoming Third World countries.

Short-term profits and executive and board bonuses and stock options are maximized at the cost of the destruction of the domestic consumer market.

Plunder Capitalism also privatizes as much of the public sector, such as the military, as possible, thus driving up the cost of the Pentagon’s budget. Jobs that the soldiers themselves formerly did are given to politically-connected firms. What was once KP (kitchen patrol) is now provided by an outside private service. Private mercenaries hired by the Pentagon collect as much in a month as troops in the line of fire earn in a year. I don’t know that the army any longer has a supply organization other than the private business that has the contract.

Medicare and Medicaid are the next to be privatized, along with Social Security. The tax cut will result in deficit and high interest rate hype, and these lies will be used to save the workers from high interest rates on their mortgage, credit card, and student loan debt by scaling back or privatizing Medicare, Medicaid, and Social Security.

The environment and public lands will be sacrificed to the private profits of timber, mining, and energy companies. Grizzly bears and wolves are losing their protection under the endangered species act so that states can sell trophy hunting licenses to men who have to prove their manhood by killing an animal with a high-powerful rifle at a safe distance.

What we are witnessing is the complete looting of America and the entirety of the West. While the Western World collapses, the insouciant, submissive people sit there sucking their thumbs while they are being ruined.

Nothing is left of the West except looters at work.

This tax bill is an abomination, an act of brutal plunder. Its sponsors should be tarred and feathered and ridden out of town on a rail, if not hung from a lamp post.

Is Financial Argmageddon Bullish For Stocks? One Bank"s Surprising Answer

Everyone knows that after nearly a decade of capital markets central planning by the world"s central banks, "good news is bad news." But did you also know that financial armageddon has become the most bullish catalyst to buy stocks? That"s the understated take-home message from the year ahead preview by Macquarie"s Viktor Shvets published last week. It is also the conclusion that One River Asset Management"s Eric Peters reached in his latest weekend notes.

While we will have much more to comment on Macquarie"s rather macabre 2018 preview, which is arguably one of the most honest, comprehensive, and objective predictions of what to expected from the "central bank/market confidence boosting nexus", we will highlight the one argument that has served to promote countless BTFD algo-driven stock rips, summarized in the following blurb, which is a sublime explanation by Viktor Shvets the worst things are, the more you should buy:

If volatilities jump, CBs would need to reset the ‘background picture’. The challenge is that even with the best of intentions, the process is far from automatic, and hence there could be months of extended volatility (a la Dec’15-Feb’16). If one ignores shorter-term aberrations, we maintain that there is no alternative to policies that have been pursued since 1980s of deliberately suppressing and managing business and capital market cycles. [T]his implies that a relatively pleasant ‘Kondratieff autumn’ (characterized by inability to raise cost of capital against a background of constrained but positive growth and inflation rates) is likely to endure. Indeed, two generations of investors grew up knowing nothing else. They have never experienced either scorching summers or freezing winters, as public sector refused to allow debt repudiation, deleveraging or clearance of excesses. Although this cannot last forever, there is no reason to believe that the end of the road would necessarily occur in 2018 or 2019. It is true that policy risks are more heightened but so is policy recognition of dangers.

 

We therefore remain constructive on financial assets (as we have been for quite some time), not because we believe in a sustainable and private sector-led recovery but rather because we do not believe in one, and thus we do not see any viable alternatives to an ongoing financialization, which needs to be facilitated through excess liquidity, and avoiding proper price and risk discovery, and thus avoiding asset price volatilities.

Translation: central banks remain trapped by the mountain-sized bubble they have blown with years of QE and ZIRP/NIRP, and once volatility returns, and risk assets plunge, CBs will have no choice but to scramble right back and prevent the pyramid from keeling over and undoing a decade of fake "wealth creation" which was pulled from the future to the tune of $15 trillion in central bank asset purchases, which while still rising is about to go into reverse in just over a year"s time.

 

If that"s not enough, here is One River"s Eric Peters, with the exact same conclusion:

Anecdote

 

“The market has an accident, the Fed returns to QE, slashes interest rates, bonds surge, stocks recover,” said the CIO, high atop his prodigious pile, alone. Staring into the distance. Squinting, straining.

 

“The correlation between bonds and equities remains negative, the risk parity equity/bond portfolios are dented but not destroyed. And we descend to the next lower level in real interest rates. US bond yields turn negative. In essence, we prolong the paradigm that has driven markets for a few decades.”

 

Far below, economies hummed in harmony, capitalists collecting their expanding share. “A continuation of this paradigm is what everyone believes. And I just doubt that outcome so sincerely.” Hidden within the distant economic whir, labor strived, struggled. Their wage growth anemic, their children indebted, career prospects uncertain.

 

“It has taken time, but the political context for a regime shift is now established; populism is evident in recent elections. And the academic context for a seismic economic policy shift is in place too.”

 

The extraordinary response to the global financial crisis prevented depression. But the price of salvation is proving to be as profound as it is impossible to precisely measure -- unexpected election outcomes, political paralysis, an isolationist America, de-globalization, fake news, opioid epidemics.

 

And connecting it all, a corrosive, woven thread; injustice, unfairness, inequality, hypocrisy, distrust, endemic, growing. “We are on the cusp of great change, the old paradigm is set to shift,” he said, at altitude, the air crisp, clear.

 

“The market has an accident, monetary policy is seen to be bust, the models have been wrong, we have to change what we do, we can’t go down the same route, we need to move to a different policy mix. Fiscal expansion, infrastructure, labor over capital. We’re moving to something that may be great for the economy, but no good for asset markets. New Regime -- end of story.”

Citi: Central Banks "Took Over" Markets In 2009; In December The "Unwind" Begins

Citigroup"s crack trio of credit analysts, Matt King, Stephen Antczak, and Hans Lorenzen, best known for their relentless, Austrian, at times "Zero Hedge-esque" attacks on the Fed, and persistent accusations central banks distort markets, all summarized best in the following Citi chart...

... have come out of hibernation, to dicuss what comes next for various asset classes in the context of the upcoming paradigm shift in central bank posture.

In a note released by the group"s credit team on March 27, Lorenzen writes that credit"s "infatuation with equities is coming to an end."

What do credit traders look at when they mark their books? Well, these days it is fair to say that they have more than one eye on the equity market.

Understandable: after all, as the FOMC Minutes revealed last week, even the Fed now openly admits its policy is directly in response to stock prices.

As the credit economist points out, "statistically, over the last couple of years both markets have been influencing (“Granger causing”) each other. But considering the relative size, depth and liquidity of (not to mention the resources dedicated to) the equity market, we’d argue that more often than not, the asset class taking the passenger seat is credit. Yet the relationship was not always so cosy.  Over the long run, the correlation in recent years is actually unusual. In the two decades before the Great Financial Crisis, three-month correlations between US credit returns and the S&P 500 returns tended to oscillate sharply and only barely managed to stay positive over the long run (Figure 3)."

What is the reason for this dramatic pick up in cross-correlations? A familiar one, of course (see the top chart): "Much of the correlation not just between these two, but also with many other asset classes seems closely associated with the ongoing central bank balance sheet expansion."

However, now that global central banks are entering the tightening phase, and as the balance sheet slows, "or even begins to reverse over the coming quarters, we expect the negative impact on credit will be more than proportionate."

Lorenzen also warns that while things might not quite revert to the historical norm, to our minds, there are at least three reasons to suspect that the relationship between debt and equity won’t stay this cozy for much longer:

• Risk/reward is skewed heavily in favour of the equity market at these valuations.


• The cycle is maturing.


• And central bank distortions are diminishing.

To be sure, it"s not just central bank manipulation of markets: one key factor mentioned by the Citi credit strategists is the maturity of the cycle which will increasingly put capital structure into play.

One reason for that is that "credit and equities are impacted equally by the changing mix of fundamental drivers during the cycle. Both credit and equities very obviously benefit from the natural improvement in earnings that tends to occur early on in an economic expansion. However, as the expansion matures, growth in operating earnings tends to fade (Figure 6), Companies wishing to maintain the momentum in their share prices increasingly resort to releveraging, be it through investment, M&A or share buybacks to make up for fading organic growth. However, this capital structure arbitrage obviously has a very different (i.e. negative) impact on credit.

Well, maybe in theory, but in practice spreads and yields remain stubbornly tight, and thus beckong corporate management to keep engaging in financial engineer. Citi admits as much in saying that "in that sense, this cycle has perhaps been atypical, in that US corporates have resorted to share buybacks much earlier in the expansion than normal. This was in part a response to the glaring gap between the cost of equity and the cost of debt, but also a defensive reaction to a lack of investment opportunities in a recovery characterised by weak demand and a lack of pricing power. Credit is more susceptible to an end to unconventional policies."

However, that does not mean that eqities are impervious to cycle shifts. If anything, the belated response in risk assets will simply mae the eventual drop that much more acute, as increasingly more have been observing the "feedback loop" between equity prices and selling vol (see Friday"s WSJ piece on the topic).

Which, incidentally. brings us to the topical conclusion: as we discussed when commenting on the "feedback loop" piece, it is all made possible by central banks pressing down on vol and being the "buyer of last resort" whenever a market correction takes place. Citi admits as much and reverts to the original topic of the conundrum of "why the strong correlation between and debt and equity markets still holds.

To our minds, the obvious explanation is central banks. Without turning this into yet another essay on QE and negative rates, we think their policies have overridden normal market behaviour in response to the evolving cycle.

Citi then shows how a wide spectrum of asset classes has been exceptionally correlated since the end of the GFC when viewed on a normalised basis. "The common factor in all of these (approximated by a simple average) in turn correlates remarkably well with the rate of expansion in central bank holdings of securities (Figure 8)."

And while Lorenzen writes that he does not want to turn his latest report into "another essey on QE", he does just that:

This suggests there may be distortions in all. But to our minds credit is clearly more distorted than most others, like equities, are – especially in Europe. Policies intended to flatten the curve and bring long-dated real interest rates down have left total return buyers with precious little return potential from taking rates risk. Taking credit risk instead has been an obvious choice, encouraging inflows and, in turn, spread tightening.

The punchline: "It’s no accident that this rise in return correlations between equity and credit (Figure 3) occurred almost exactly at the time when the central banks effectively ‘took over’ markets."

While that worked as long as central banks were bidding everything up starting in 2009 (again, see top chart)  now that said period is ending, the "unwind is underway":

However, with the Fed now tightening faster than the market anticipated not long ago, and our economists expecting that it will cease to reinvest maturing securities in its portfolio from December this year, the unwind is underway. To us, this adds to the asymmetry in risk/reward between credit and equities here.

Even so, Lorenzen says not to panic just yet:

Perhaps the very short-term correlations between equity levels and credit spreads can be sustained. We’d argue that the credit trader should spend as much time, if not more, looking at Bunds as EuroStoxx these days. But that does not preclude a high degree of correlation if the equity trader does the same.... However, what cannot be sustained indefinitely, in our view, is the correlation in medium-term returns for all the reasons we outlined above.

In other words, the closer we get to December, or whenever the Fed begins renormalizing the balance sheet, the greater the trader angst, and impetus, to undo all the trades that worked in the time when central banks had "taken over the markets."

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)

David Rosenberg Calls For A Multi-Trillion, "Helicopter Money" Stimulus Package

With the inherent weakness in US GDP and the rising probability of a recession (two weeks ago Bank of America modeled that the next recession would likely start roughly one year from now), Gluskin Sheff"s David Rosenberg thinks that with monetary options exhausted it will take a fiscal boost in the trillions of dollars to kickstart the economy. These issues were discussed in an extended interview with Real Vision TV, where the chief economist and strategist at Gluskin Sheff proposed some radical policies to engineer the growth needed in nominal income. 

His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.

Here are some of the interview highlights:

Doing the Same Thing Over Again and Expecting a Different Outcome

Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.

“There are some people saying a recession is here right now,” Rosenberg says, “I don"t think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that"s never happened outside recession, check. We"ve had now going into six quarters of profit contraction, year over year. That"s only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”

Rosenberg’s problem with monetary policy, now in its 7th year of unorthodox experimentation, is that it has become a weak antidote to structural problems in the economy (even if it is still quite potent at boosting financial asets). Fiscal policy on the other hand, if constructed right, could be the answer due to its very powerful multiplier impact. “I can"t say that I know for sure, but it"s the old Einstein adage about the definition of insanity,” Rosenberg said. “And we"re finding that we"re really-- if we"re not hitting the wall on monetary policy, we"re certainly seeing classic economics 101 of the law of diminishing returns.”

In terms of infrastructure spending, he said that one lesson from recent history and the Great Recession is that you"ve got to have the credibility to convince people that this is going to be permanent and not temporary, in terms of the impact on the economy. “So it can"t be transitory. It"s got to be very big. With interest rates as low as they are, there"s certainly the capacity. I mean, you"ve got a lot of governments around the world issuing 50 or 100-year bonds. So this is a once in a lifetime opportunity to borrow money.”

A Couple of Trillion Dollars of Helicopter Money

While companies have been taking advantage of these conditions to borrow money, the funds have not been invested in the real economy. Share buybacks have become more popular, while personal savings rates have increased amid the economic uncertainty. This all boils down to a big case for government spending, with monetary policy joining forces with fiscal policy in the form of helicopter money.

“What you do with helicopter money is you finance it off the central bank"s balance sheet because we"re talking doing something very dramatic to reflate the economy,” Rosenberg said. “It"s not a few hundred billion dollars. It"s a couple of trillion...I know I"ll get accused of bailing out the sinners, but, my lord, we"ve already done that. I mean, nobody went to jail.”

One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers. Employment growth for the 65s and over is 7%, meanwhile, as the aging boomers have to work longer because they didn’t save enough for retirement. 

“Helicopter money is QE plus where, say, the treasury issues a perpetual-- call it, like, a century bond, a $2 trillion bond on the Fed"s balance sheet. And so when that bond matures, it"s, like, we"re all dead in the long run at that point. And then the Treasury can use that money to stimulate growth. "

The beauty of this idea, according to Rosenberg is that you don’t have to go through Congress, with such difficulty in achieving corporate or personal tax reform.  “It would lead to a permanent increase in the monetary base. Inflation expectations would go up, which means that real interest rates would go negative. And the theory is that that would provide a bigger thrust towards getting what we all want, which is sustainable and accelerating nominal income growth.“

Real Risk of Fed Mistakes or Trump Trade War

Sustainable and accelerating nominal GDP is certainly what’s required while the risk persists that we could be shocked into recession, or the Fed could make a mistake in raising interest rates too aggressively.

“That"s what happened in December of last year. They raised rates 25 basis points, but the overall financial tightening, in terms of what it meant for the dollar or in credit spreads and the stock market, it was really, like, 75 basis points of tightening. And the next thing you know, the economy slows to stall speed."

Another concern for investors is the prospect of a Trump presidency, bringing with it the potential start of a trade war. That could provide the sort of exogenous shock to cause the economy to go into recession, Rosenberg stated, noting that historically all the recessions in the post war period have been created by the Fed.

“The problem is that when you have the economy running on average 1% growth, or 1% plus, which is not a big cushion. And so, you know, it"s a complicated question to try and handicap a recession on us right now. There"s a lot of people out there that are convinced that a recession is coming.”

To watch the full interview with David Rosenberg, visit Real Vision TV.  You can access this and many more interviews with a free trial. 

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Oh, if Rosenberg"s idea gets traction - and execution -  which it will eventually, as we have said since our first days in 2009, buy lots and lots of gold.