backwards society

We now live in a nation where doctors destroy health, lawyers destroy justice, universities destroy knowledge, governments destroy freedom, the press destroys information, religion destroys morals, and our banks destroy the economy.

-- Michael Ellner (1997) & Chris Hedges (2010)

imbalanced resource / capital distribution

Three dynamics that define any human civilization are the distribution of resources, capital, and agency. Resources are straightforward — food, energy, shelter, etc.  Capital is financial (money), tangible (tools, ownership of land, etc.) and intangible (social / human capital). Capital productively invested produces income. Agency is control of one's life, having a say in community / public decisions, and having some control and power over one's circumstances.  When these three are distributed asymmetrically -- where the majority of the resources, capital, and power are distributed to an elite -- society and the economy are imbalanced and prone to stagnation and eventual discord.

Statistics are unequivocal: income-wealth inequality in the U.S. continues reaching new heights. This is reflected in asymmetric access to healthcare and other resources, asymmetric ownership of income-producing capital, and limited agency.  The bottom 90% of the U.S. economy has been decapitalized: debt has been substituted for capital. Capital only flows into the increasingly centralized top tier which owns and profits from the rising tide of debt that's been keeping the bottom 90% afloat for the past 20 years. Globalization and financialization have richly rewarded the top 5% and especially the top 0.1%. Everyone else has been been reduced to a powerless peasantry of debt-serfs.

America has no plan to reverse this destructive tide of neo-feudal pillage. Our leadership's "plan" is benign neglect: send a monthly stimulus of bread and circuses (the technocrat term is Universal Basic Income or UBI) to all the disempowered, decapitalized households so they can stay out of trouble and not hinder the New Nobility's pillaging of America and the planet.

As for agency: Martin Gilens of Princeton University and Benjamin Page of Northwestern University are authors of the study "Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens."  Professor Gilens gave this brief summary of their conclusions:

"Ordinary citizens have virtually no influence over what their government does in the United States. And economic elites and interest groups, especially those representing business, have a substantial degree of influence. Government policy-making over the last few decades reflects the preferences of those groups — of economic elites and of organized interests." (Foreign Affairs, Jan. 2021, Monopoly Versus Democracy)

That is as definitive as soaring income-wealth inequality. Both are inherently destabilizing.

Meanwhile, central bankers, monopolists and the politicos whose campaigns are funded by monopolists are all frantically trying to convince us their policies will heal the metastasizing tumor consuming America.  Borrowing a quarter of the nation's entire economic output every year to prop up an ineffective, corrupt status quo is merely kicking the can down the road while not addressing the root problems in our country.

If America cannot bear to discuss these realities (and structural solutions) openly, the social, economic, and political orders will unravel in a non-linear Cultural Revolution with a highly uncertain outcome.

-- Charles Hugh Smith (The Daily Reckoning) March 27, 2021

 

Speculation Encouragement

Needless to say, if you bail out speculators, they will simply speculate more. And if you do it over and over and predictably so, you will extinguish the fear of risk and loss, which is the only thing which keeps the speculative impulses in check.

-- David Stockman (as quoted in The Daily Reckoning) Sept. 24, 2019 (slightly edited)

market manipulation

The problem with any kind of market manipulation (what central bankers call “policy”) is that there’s no way to end it without unintended and usually negative consequences. Once you start down the path of manipulation, it requires more and more manipulation to keep the game going.  Finally it no longer becomes possible to turn back without crashing the system.

Of course, manipulation by government agencies and central banks always starts out with good intentions. They are trying to “save” the banks or “save” the market from extreme outcomes or crashes.  But this desire to save something ignores the fact that bank failures and market crashes are sometimes necessary and healthy to clear out prior excesses and dysfunctions. A crash can clean out the rot, put losses where they belong and allow the system to start over with a clean balance sheet and a strong lesson in prudence.

Instead, the central bankers ride to the rescue of corrupt or mismanaged banks. This saves the wrong people (incompetent and corrupt bank managers and investors) and hurts the everyday investor or worker who watches his portfolio implode while the incompetent bank managers get to keep their jobs and big bonuses.  All it does is set the stage for a bigger crisis down the road.

-- Jim Rickards (The Daily Reckoning) July 31, 2019

Central Bank Experimentation

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round.  All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences.  This is not capitalism, nor does this ongoing farce constitute free market price discovery. It’s politburo based central planning, desperately trying to keep the balls in the air.  

The pretense is gone, it’s all about keeping the illusion alive that the Fed knows what it’s doing, that it’s always there to save markets from any trouble.  But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.  Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong.  Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?  We’re all staring at a colossal policy failure with no accountability.  Brace yourselves as no one, absolutely no one, can know how this will turn out.

-- Sven Henrich (Northman Trader) June 7, 2019 (edited)

Too Big to Fail (Again)

In the wake of the 2008 financial crisis, the bank bailouts did not save the economy as their architects advertised. Rather, they bolstered the biggest U.S. banks from an insolvency crisis of their own creation. Those banks were, and remain, too big to fail. Their CEOs are too connected to jail.

The leaders of the major banks oversaw multi-trillion dollar enterprises that committed fraud, lost other people’s money, harassed public service members, and fired thousands of low-level employees. Worst of all, they have put the entire financial system and markets at the edge of ruin again.

Big banks know they have political and Federal Reserve support. Low or negative rates provide banks access to cheap capital if they need it, which encourages greater recklessness than if they had to “pay” more for it. They have taken this as a license to gamble large. By rescuing and supporting the big banks’ dangerous behavior, such recklessness has been not only condoned but encouraged.

The argument big banks make about their mega derivatives positions is that they are “hedged.” In other words, though the total (or “notional”) figure is large, most of the long and short positions net out against each other. The problem with that assessment is that the big banks take long and short positions against each other. They have set themselves up again in domino fashion.

We are heading for another financial crisis at some point. No one can say when for certain, but probably sooner than later. There’s a lot more money supporting the system artificially that the central banks have conjured than we had going into the last crisis. If that subsidy was to go away or be reduced, the money would come draining out of the same financial system that it’s been inflating.

-- Nomi Prins (Daily Reckoning) May 23, 2019 (edited)

Deficits Do Matter... Eventually

"Deficits don’t matter," said Dick Cheney....

If there were no tomorrow, Mr. Cheney would be right. Why not eat tomorrow's "seed corn" today? There would be no reason not to reach for another dessert, or park your car in a handicapped space, or tell your boss exactly what you think of him.

The trouble is -- there is a tomorrow. And tomorrow is when a drinking binge turns into a hangover, a bad marriage turns into a divorce, and your boss fires you. Tomorrow is when deficits DO matter. 

We don't know exactly what will happen or when. But we know the world still turns. Every boom not supported by real savings and real increases in output is phony. Tomorrow is when you find out.

Today's prosperity, such as it is, was built on fake money, fake savings, and fake signals from the Fed. The feds have pumped $37 trillion in "excess credit" -- above and beyond the traditional relationship between debt and GDP -- into the system over the last 30 years.

And now, the economy -- especially the parasitic half of it run by the Deep State -- depends on more and more fake money and fake credit. That's the one thing Republicans, Democrats, and Trumpistas agree on -- nothing will be allowed to get in the way of the fake-money flow. With the sluices open, the debt will rise. How much? No one knows. All we know for sure is that, with nothing to stop it, you can expect it to keep going up -- until the whole economy drowns in it.

-- Brian Maher (The Daily Reckoning) Sept. 22, 2017

The Undrainable Swamp

The establishment’s concerns have less to do with peace and security than raising sales, earnings, and stock prices in the Atlantic-area's military industrial complex. And the establishment won’t abide any threat to its power.

The Swamp is so undrainable that it will end up making mincemeat of Donald Trump.... The ultimate causes of his demise are anchored deep in the failing status quo. America is so addicted to war, debt, and central bank driven false prosperity that even the most resourceful and focused challenger would be taken down by its sheer inertia.

But [Trump] is so undisciplined, naïve, out-of-touch, thin-skinned, unfocused, and megalomaniacal that he is making it far easier for the Swamp critters than they deserve. To a very considerable extent, in fact, he is filling out his own bill of indictment.

-- David Stockman (The Daily Reckoning) August 4, 2017

Trumped

[Donald Trump] is now fully at war with the mainstream media and the national security apparatchiks of the Deep State — and nothing could be more conducive to exposing the folly of Washington's imperial adventures abroad and its fiscal bankruptcy at home.... [T]he "Trump is soft on Russia" meme is nothing more than the desperate attempt of the Deep State to protect its dirty secret that America has no real enemies that can militarily threaten the homeland.... The ruling elites are determined to take the Donald down, and whether they succeed or not, it is extremely probable that Washington will grind to a halt — Watergate era style — by early spring....

[E]conomic recovery and the restoration of honest democracy in America depend upon a plunge in the wildly inflated stock market. It is that event which would finally discredit the monetary central planners at the Fed, destroy the insidious regime of Bubble Finance they have created, [and expose] the financial fraud which has permitted the Imperial City to fund the nation's bloated Warfare State and Welfare State with reckless abandon. Fiscal rectitude will only return when a thundering financial trauma demonstrates to the American public that a money printing central bank is its mortal enemy and that the Fed's charter to buy government debt and rig interest rates and stock prices must be forever revoked.

-- David Stockman (The Daily Reckoning) Feb. 21, 2017

American Corporatocracy

One little-remarked consequence of central banks' policies of near-zero interest rates and quantitative easing is the unrivaled dominance of mobile global capital.  The source of corporate political power is the ability to borrow essentially unlimited sums for next to nothing: what I have long termed free money for financiers.  Armed with central-bank supplied unlimited credit, global capital can outbid local residents and businesses. Over time, profitable enterprises and assets end up in corporate hands....

The same dynamic — the unparalleled power of cheap credit — then funds corporate dominance of the political process.  As corporations buy up productive assets, they consolidate these assets into cartels and quasi-monopolies that can be protected from competition by lobbying and campaign contributions.  Governments come and go, candidates come and go, and political movements come and go, but the Corporatocracy remains in charge. 

-- Charles Hugh Smith, Of Two Minds blog (edited)

Goodhart's Law

"Once a social or economic indicator is made a target for the purpose of conducting social or economic policy, then it will lose the information content that would qualify it to play such a role.  When a measure becomes a target, it ceases to be a good measure."
-- Charles Goodhart, 1975



Humans naturally optimize what is being measured and identified as important.  This is the result of humanity’s highly refined skill in assessing risk and return. The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives.  The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. 

If we accept that growth as measured by gross domestic product (GDP) is the measure of prosperity, politicians will pursue the goal of GDP expansion.  If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not.  If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available.

There is a growing dissatisfaction in the economics field with the current measures of economic activity: GDP, unemployment, and so on. This dissatisfaction reflects a growing awareness that these legacy metrics do a poor job of capturing what is actually important in fostering sustainable, broad-based prosperity, what many call well-being.  If we choose counterproductive metrics, we build perverse incentives into the system, incentives that guide the goals, strategies and behaviors of participants.

Rather than measure consumption and metrics that incentivize debt, what if we measure well-being and opportunities offered in our communities? What if we measured doing more with less rather than consuming more? What if our primary measure of economic well-being was the reduction of inputs (resources, labor, capital, etc.) that resulted in higher output (increased well-being)?  Systemic success or failure arises from our choices of what to measure and what thresholds we set as meaningful.

-- Charles Hugh Smith (The Daily Reckoning)

inflation deficiency nonsense

For several years now, a small group of Keynesian academics and hacks have seized nearly absolute financial power. They’ve used the Fed’s printing presses to justify the lunacy of unending zero interest rates (ZIRP) and massive quantitative easing (QE) on the grounds that there is too little inflation. This whole consumer inflation-targeting scheme is an inherently preposterous notion. There is not one scrap of evidence that 2% consumer inflation is better for rising living standards and societal wealth gains than is 0.2%. And there is much history and economic logic that points in exactly the opposite direction....

[T]here isn’t an inflation deficiency problem, and there never has been. The whole 2% inflation mantra is just a smoke screen to justify the massive daily intrusion in financial markets by a power-obsessed bunch of monetary central planners. They made it up and then rode it to ever increasing dominance over the financial system.

-- David Stockman (The Daily Reckoning) Feb. 22, 2016

faulty Fed figuring

[Federal Reserve Chair Janet] Yellen said at least one thing of importance last week.... She confessed to the frightening truth that the Fed formulates its policies and actions based on forecasts of future economic developments. [Unfortunately] our monetary politburo couldn’t forecast its way out of a paper bag.... [I]t’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed U.S. economy and that balance sheets don’t matter....

[T]he economy is now seamlessly global, meaning that everything which counts -- such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks -- is planetary in nature.... Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidge to confirm the U.S. economy’s strength and that the Keynesian nirvana of full employment is near at hand....

[I]n today’s world of global labor competition in goods, offshored business services, episodic domestic gigs, temp agency labor delivery, and Wal-Mart style labor scheduling by the hour and time of day, week, month, and season, the whole idea of “full employment” is a relic.... [Labor distribution factors] shift and morph steadily over time and in response to new technological and cultural developments. They are utterly beyond the reach of 25 basis points of interest rate shifts on the money markets. So the unemployment rate tells you almost nothing useful. By contrast, there are an immense number of leading indicators which track the global credit bubble and false boom it enabled. They bear far more directly on the main street outlook than does the Fed’s primitive bathtub model of the US economy. 

-- David Stockman (The Daily Reckoning) Dec. 22, 2015

Bubble Financialization

[C]entral bank bubble finance has fostered an existential crisis in what remains of American capitalism....  [A]s the main street economy of work and production has been going nowhere, the financial system has erupted skyward....  How did this massive inflation of the financial sphere happen?  Since the time of Greenspan’s abject panic in the wake of Black Monday in October 1987, the Fed has chronically pegged the money market rate below market-clearing levels.  In doing so, they fueled an embedded carry trade that has mushroomed relentlessly....

In an honest free market, gamblers would have to pay more for their carry funding.  They’d face much greater uncertainty as to its price and availability and dissipate far more of their winnings hedging their portfolios than is required under the current central bank-driven regime of bubble finance....  When debt is priced drastically below its economic cost and receives a deep tax subsidy to boot, a variation of the supply side theorem manifests itself. Namely, when the cost of servicing debt capital is made artificially low, you get a lot more of it -- from the public and private sectors alike....

[T]he debt was overwhelmingly used for financial engineering....  The relentless trading, churning and synthesizing of assets and derivatives within the giant bloated system of finance has almost nothing to do with raising or allocating capital for productive use.  Instead, this giant $95 trillion pool is where honest savings from the household and business sectors go to be scalped, appropriated, and stolen by the hedge funds, dealers, financial engineers, and gamblers which populate the casino....

And the denizens of the Eccles Building keep their heavy foot on the monetary accelerator as they witlessly inflate a $95 trillion financial bubble....  This is a clear and present danger to American capitalism fostered by an unelected monetary politburo in thrall to its own lust for power and mesmerized by its own doctrinaire group think.  The tragedy is that nothing can stop them except the thundering crash of the gargantuan bubble they have single-handedly enabled.

-- David Stockman (The Daily Reckoning) May 14, 2015

equilibrium interest rates?

A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates "artificially low." Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by "the markets." The Fed's actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate.
 -- Ben Bernanke (Brookings Institution blog posting) March 30, 2015 




There is no affirmative case that control of interest rates spurs a magic elixir called more debt and higher leverage ratios which, in turn, generate improved economic performance and greater societal welfare and wealth. Accordingly, the Keynesian central banking remit, perforce, rests on the default case of prevention of business cycle instability and warding off the alleged suicidal tendency of capitalism toward depressionary swoons.... [But] the blinding empirical reality is that since the arrival of Keynesian central banking under Greenspan and his successors we have had the "Great Immoderation," not the nirvana of stable, endless growth and a recession-free world....

The Fed does not need to manage interest rates, and therefore does not need to embrace Bernanke’s spurious answer to the question of "what rate." Bernanke’s comments on the "equilibrium real interest rate" ... amount to pure gibberish -- academic jargon for unbounded, plenary power to manage the entire pricing machinery of the world's $300 trillion financial system. Indeed, lurking in the intellectual mush ["healthy operation of the economy, full employment of labor and capital resources"] ... is the true rationale for the greatest exercise in mission creep during the entire history of the modern state....

There is nothing in [the Fed's justification] that can be objectively measured or tangibly pegged....  [T]he real world of capitalism is far, far too complex and dynamic to be measured and assessed with the exactitude implied by Bernanke’s gobbledygook. In fact, what his purported necessity for choosing a rate "somewhere" actually involves is the age old problem of socialist calculation. It can’t be done -- and most especially not in the most fluid, complex and fastest moving markets known to man. That is, the global financial markets for debt, equity, loans, commodities and all their derivatives.

-- David Stockman (The Daily Reckoning) April 1, 2015

market speculation and waste

When the central banks turn the money markets and the capital markets into carry-trade driven casinos... the result is inherently a massive, dead-weight loss to economic output and national wealth.  That's because capital and other economic resources are drastically misallocated to pointless secondary market speculation and pure economic waste....

[A]bsent the inherent checks and balances of the free market, these central bank-enabled casinos do not simply boom and bust randomly;  they do so chronically and predictably.  With the ever-increasing confidence levels developed over the bubble cycles since the early 1990s, an entrenched class of permanent, professional speculators has learned to front-run the maneuvers of our monetary politburo almost perfectly.

-- David Stockman, The Daily Reckoning (April 16, 2014)

risk and fragility

The more you try to de-risk a system, the more accident-prone it becomes, and the more damaging the accidents are....   By using interest rates and monetary policy to try to prevent recessions, central bankers are making the world less safe and more likely to have a horrible accident. They are making the financial system more fragile....

You might not believe that the world becomes more dangerous precisely because you're trying to make it safer. But studies show that after the introduction of seat belts, the number of car accidents went up. Why? Well, people must have felt that because the belts made them safer, and made accidents more survivable, it was OK to take more risks, drive faster and otherwise abdicate responsibility for their own actions....

[I]t's a psychological phenomenon we're talking about. If people are led to believe they are safer, they will quite naturally be less vigilant about risk. [A] sense of risk is a highly useful advantage in evolutionary terms. Risk tells you when something big is at stake and the quality of your actions and decisions matter. If you try to systematically eliminate risk from society -- even if it's out of good intentions -- you aren't helping people at all. You're robbing them of a basic instinct that promotes their ability to look after themselves....

--Dan Denning, The Daily Reckoning (May 8, 2013)

free markets adapt

Markets that are “allowed” to crash, sometimes violently, are usually quick to adapt and evolve, something akin to Schumpeter’s “creative destruction.” They are dynamic, responsive, adaptive. In sharp contrast, markets that receive government / taxpayer-sponsored bailouts are “fragilized”-- rendered deaf to the market’s timely lessons and mute in response to the new demands and expectations of market participants.
-- Joel Bowman, The Daily Reckoning (April 14, 2013)

rigged markets

Markets are so rigged by policymakers that I have no meaningful insights to offer. I am simply stunned that our policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being told to double up on these same policy decisions [that have failed]. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people.

If you listen to the [policymakers in the US and Europe], it seems that the only solution they can offer up is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again greedy enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now "richer." When —- as they do by definition —- these bubbles burst, those who have been suckered in will realize that their "wealth" is instead an illusion, which in turn will be replaced by default risk...

When looking for where the bubbles may be, realize this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere — in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices — you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market... When this bubble bursts, I don’t think there is an easy way out. Who will be the bailout provider?

The longer we have to wait for the final resolution to the global financial crisis, the bigger and more devastating the final leg lower will be.

-- Bob Janjuah, Nomura Investments (February 20, 2012)

economists' numbers

Economists are not stupid. Especially those who win Nobel Prizes. They test well. They go to good schools. They can usually do higher math. Math is important to modern economics. It makes it look like science. So, if you review almost any PhD thesis in economics over the last 20 years, you are bound to find numbers. Lots of numbers. You’ll also find symbols. Greek symbols. And symbols from the mathematician’s trade. These symbols mean something. So do the numbers. And you can use these meanings to tease out even more confections. Complex. Sophisticated. Precise. Impressive. And generally not worth a damn. 

We say that after long observation. It is the result of careful reflection and reckless intuition. The observation has occurred over the last dozen years or so. Despite all their numbers, formulas and Nobel prizes, America’s leading economists, including the lead dog economist himself, Ben Bernanke, were apparently unable to see something so obvious that even we spotted it: the collapse of housing and the blow up of the credit market. Not that they are dumb. They are just following a different career path. 

A genuine economist keeps his eyes open. He reads the paper. He reads books. He studies history. He talks to taxi drivers and businessmen. He tries to understand what has gone on in the past... and what might be going on today. He has no illusions about it. The future will never be like the past. But there will be similarities. And those similarities can be studied. He has little appreciation for numbers. He knows they can’t be trusted. They are like whores and lobbyists — they will do their work for whomever pays them. He is especially wary of precise numbers. The greater the precision, the greater the lie. 

With their vision obscured by all their precise numbers and enhanced calculations, most economists could not see the crisis coming. On the evidence, their numbers are not very useful. But now they bring them out again... this time to solve the problem they never saw coming. 

-- Bill Bonner, The Daily Reckoning (July 19, 2012)