Blog Archives

The Fed Can’t Reverse the Decline of Financialization and Globalization

The global economy and financial system are both running on the last toxic fumes of financialization and globalization.

For two generations, globalization and financialization have been the two engines of global growth and soaring assets. Globalization can mean many things, but its beating heart is the arbitraging of the labor of the powerless, and commodity, environmental and tax costs by the powerful to increase their profits and wealth.

In other words, globalization is the result of those at the top of the wealth-power pyramid shifting capital around the world to exploit lower costs of labor, commodities, environmental regulations and taxes.

This manifests as offshoring of jobs, the stripmining of forests, minerals, etc., the degradation of local ecosystems, the decline of tax revenues derived from capital and the explosive rise in stock market valuations as wages stagnate or decline.

A key element in globalization is the transfer of risk from the owners of capital to the workers and public resources. Examples of this transfer of risk abound: rather than pay workers benefits, corporations game part-time/full-time labor laws so workers’ health insurance is paid by taxpayers (Medicaid). Corporations pay wages too low to survive so workers depend on public-sector assistance (food stamps, etc.)

Rather than provide vehicles to workers who drive for a living, corporations such as Uber and Lyft transfer all the risks of ownership, maintenance and enterprise to the drivers. And so on.

Financialization is the exploitation of assets/income that were previously safe from predation by those with access to low-cost central bank credit. While definitions vary, mine is:

Financialization is the mass commoditization of debt collaterized by previously unsecuritized assets, a pyramiding of risk and speculation that is only possible in a massive expansion of low-cost credit and leverage for those at the top of the wealth-power pyramid: financiers, banks and corporations.

One example is the student loan “industry,” which prior to financialization did not exist. A previously safe from predation asset/source of income–college degrees–has been securitized so that loans issued to students for largely worthless diplomas can be sold globally as “secure assets with guaranteed yields.”

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Is the Tech Bubble Bursting?

Is the decade-long tech bubble finally popping? Tech bulls are overlooking the fundamental reality that the drivers of Big tech’s phenomenal growth–financialization and expansion into mobile telephony– are both losing momentum.

A third dynamic–Big Tech monetizing privately owned assets such as vehicles and homes– has also reached saturation and is now facing regulatory barriers.

Let’s start with market saturation: of the 5.3 billion adults on earth over 15 years of age, 5 billion now have a mobile phone and 4 billion have a smartphone: The end of mobile (Benedict Evans). As for teens between 10 and 15, only the truly impoverished don’t have a mobile phone of some kind.

As I discuss below, the primary dynamic of the past decade has been the integration of web-based services into mobile telephony. By any measure, that cycle is now complete.

I recently explored technology’s ties to financialization and deflationary trends in prices and profits: Two Intertwined Dynamics Are Transforming the Economy: Technology and Financialization

Technology Is Not Just Disruptive, It’s Disastrously Deflationary

The basic idea here is that the tech bubble has been inflated by a unique set of circumstances:

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If “Getting Ahead” Depends on Asset Bubbles, It’s Not “Getting Ahead,” It’s Gambling

Beneath the endlessly hyped expansion in gross domestic product (GDP) of the past two decades, the economy has changed dramatically. The American Dream boils down to social and economic mobility, a.k.a. getting ahead through hard work, merit and wise investments in oneself and one’s family.

The opportunities for this mobility in the post World War 2 era broadened as civil rights and equal rights expanded. The 1970s saw a disruption of working-class mobility as high-paying factory jobs disappeared, leaving services jobs that paid less or required more training, i.e. a college degree.

The U.S. economy took off in the 1980s for a number of reasons, including computer technologies, federal stimulus (deficit spending) and financialization (a topic I’ve covered many times). With millions more college graduates entering the workforce and the Internet creating entire new industries, the opportunities to “get ahead” increased across the social and economic spectrum.

But something changed in the aftermath of the dot-com bubble bursting. The fruits of financialization–highly leveraged debt gambled for short-term gains in markets–were extended to everyone with a job (or a willingness to lie) via liar loans, no-document loans and subprime mortgages.

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Connecting the Dots of Big Data, Soaring Corporate Profits and Trade Wars

Let’s connect the dots between these two comments from longtime correspondents: the first is on the model of collecting and selling data (Big Data), and the second on trade:

GFB:

“If I had a lot of money, would I want to do:

A) –invest in the exploration forbidding areas of the globe for oil reserves with a 50/50 chance of no results
–negotiate leases for the areas of the planet I want to extract oil in and have to negotiate with corrupt and unstable governments
–Pay for the oil extracting and transportation infrastructure
–deal with the fluctuating market values – which may make my whole investment worthless

OR

B) set up a low cost trap that has millions of people handing me for free, and with their acknowledged permission, their preferences, tastes, beliefs, and aspirations . . . which I can re-sell at almost no cost to a long list of buyers, with a price that I can set as I have the data.

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The Hidden-in-Plain-Sight Mechanism of the Super-Wealthy: Money-Laundering 2.0

We all know the rich are getting richer, and the super-rich are getting super-richer. This reality is illustrated in the chart of income gains, the vast majority of which have flowed to the top .01%–not the top 1%, or the top .1% — to the very tippy top of the wealth-power pyramid:

Though all sorts of reasons have been offered to explain this trend–I’ve described the mechanisms of financialization here for years–two that don’t attract much mainstream media attention are money laundering and control fraud, i.e. changing the rules of what’s legal so what was illegal yesterday is legal today–presto-magico, illegally skimmed wealth is now “legal.”

Correspondent JD recently submitted an excellent summary of the progression from Money Laundering 1.0 to Money Laundering 2.0:

Money laundering 1.0 is making dirty money legal, control fraud is manipulating the ‘legal’ options, and money laundering 2.0 is making sure that ‘legal’ fortunes are not taxed and cannot be clawed back.”

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The Big Reversal: Inflation and Higher Interest Rates Are Coming Our Way

According to the conventional economic forecast, interest rates will stay near-zero essentially forever due to slow growth. And since growth is slow, inflation will also remain neutral.

This forecast is little more than an extension of the trends of the past 30+ years: a secular decline in interest rates and official inflation, which remains around 2% or less. (As many of us have pointed out for years, the real rate of inflation is much higher–in the neighborhood of 7% annually for those exposed to real-world costs.)

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This Chart Defines the 21st Century Economy

One chart defines the 21st century economy and thus its socio-political system: the chart of soaring wealth/income inequality. This chart doesn’t show a modest widening in the gap between the super-wealthy (top 1/10th of 1%) and everyone else: there is a veritable Grand Canyon between the super-wealthy and everyone else, a gap that is recent in origin.

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The Real Reason Wages Have Stagnated: Our Economy is Optimized for 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.

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Marx, Orwell and State-Cartel 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.

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Do the Roots of Rising Inequality Go All the Way Back to the 1980s?

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.

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Why Is the US Dollar Rising?

On October 3rd I asked Is the U.S. Dollar Set to Soar? It seems the answer was yes. Here’s the weekly chart of the USD I posted on October 3rd:

And here’s the current weekly chart of the USD:

Note the apparent breakout above 100 and the constructive similarities to the 2014 breakout that was followed by a 20% increase in the purchasing power of the USD relative to other currencies.

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When Did Our Elites Become Self-Serving Parasites?

When did our financial and political elites become self-serving parasites? Some will answer that elites have always been self-serving parasites; as tempting as it may be to offer a blanket denunciation of elites, this overlooks the eras in which elites rose to meet existential crises.

Following in Ancient Rome’s Footsteps: Moral Decay, Rising Wealth Inequality(September 30, 2015)

As historian Peter Turchin explained in his book War and Peace and War: The Rise and Fall of Empires, the value of sacrifice was a core characteristic of the early Republic’s elite:

“Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, as mentioned previously, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen….

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