Blog Archives

Trump, Trade and Taxes

Donald Trump has made trade agreements a central issue in this presidential election, declaring trade treaties such as the North American Free Trade Agreement (NAFTA) as unfair and subject to cancellation or renegotiation.

Setting aside the issue of whether presidents can cancel trade treaties via executive orders, let’s look at the underlying issue: the erosion of manufacturing and entry-level job opportunities that lead to middle-class security and pay.

The question then becomes: what are the causes of this erosion of manufacturing and the middle class? Trade is relatively easy to finger because the flood of cheap goods into the U.S. coincided with the wholesale offshoring of manufacturing capacity.

But it isn’t quite that simple. “Free” Trade, Jobs and Income Inequality: It’s Not As Easy As We Might Think (March 22, 2016)

There are many other issues in play, including:

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Why Our Financial System Is Like the Titanic

The “unsinkable” global financial system is rushing headlong toward its encounter with the iceberg.


Why did the Titanic sink, despite being considered unsinkable? The conventional answer is the design of its watertight compartments was flawed: the watertight bulkheads were limited in height to a few feet above the waterline.

The ship was designed such that if the first few compartments were flooded, the flooding would be contained by the watertight bulkheads.

But the iceberg ripped open a gash almost a third the ship’s length, flooding the first six compartments. As the ship’s bow sank, water poured over the bulkhead into the seventh compartment, and so on, until the ship’s bow sank deep enough to bring the ship almost vertical, at which point the hull broke roughly in half–hence the two hull sections discovered on the bottom of the Atlantic in 1985.

But further analysis has revealed this isn’t the only reason Titanic sank. It turned out the ship’s hull plates were brittle due to high sulfur content in the steel, especially at cold temperatures (the water was near freezing at the time of the wreck).

Causes and Effects of the Rapid Sinking of the Titanic

Rather than deform as the iceberg scraped against the hull, the plates and rivets fractured, opening the gash that sank the ship.

<bThe technologies of the early 1900s enabled shipbuilders to construct enormous ships almost 900 feet in length capable of steaming at 24 knots, transporting passengers across the Atlantic in comfort, but the technologies that made such ships and transits low risk were not yet developed.

The fact that large ships and powerful engines could be built created the illusion of low risk, because the risk factors were invisible until disaster struck. After the disaster, the flaws in the design of the watertight bulkheads, the inadequacy of the lifeboat requirements (there were not enough lifeboats for the crew and passengers), and the deficiencies in the wireless/radio requirements (ships were not required to have radio operators on duty 24 hours a day) were all obvious.

But the flaws in the steel plates and rivets would remain invisible until the technologies of steel production finally caught up with the other shipbuilding technologies. And better detection and tracking of icebergs would have to wait for radar and better navigational technologies.

Our financial system is like the Titanic: technologies such as high-frequency trading (HFT) and innovations such as securitization and complex derivatives have enabled major players to construct an enormous, fast-moving financial system that creates the illusion of low risk because the risks are not visible until disaster strikes.

The Global Financial Meltdown of 2008-09 was a close call, the equivalent of the Titanic veering off and barely missing the iceberg. In response, authorities imposed a variety of new regulations that are the equivalent of changing the regulations guiding lifeboats and radio operations.

But these regulations did nothing to address the risks created by the technologies of financialization that have leapfrogged safety systems and the real economy. In effect, the idea that the financial system is unsinkable remains intact, even though the flaws in its design (the equivalent of the watertight bulkheads) and its core technologies (the equivalent of the flawed steel plates) remain invisible.

The financial system’s huge size and apparent strengths have created a false confidence that it is unsinkable, and the ineffective regulations imposed after 2008-09 have only added to the illusion that the risk of a complete collapse is low.

All that has been accomplished since 2008-09 is there are a few more lifeboats and better communication when disaster strikes. But the risks of financial disaster have actually increased since 2008-09, as participants have bypassed regulations via shadow banking, dark pools,etc., and deepened their dependence on HFT skimming via superfast trades executed by superfast computers.

The “unsinkable” global financial system is rushing headlong toward its encounter with the iceberg, while the passengers and crew remain supremely confident and unaware of the risks, risks that will only become “obvious” after the global financial system has broken in half and sunk to the bottom, destroying most of those who believed it unsinkable.

 
We need a new system, one we control from the ground up:
A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $8.95 and the print edition is $20.82.

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Why I Will Never Hire Anyone, Even at $1/Hour

One of the most appealing beliefs about technology–that it will always create more jobs than it destroys–is no longer true. It was true in the first and second industrial revolutions, for one simple reason: the new industrial revolution created vast numbers of low-skill jobs that offered displaced workers abundant opportunities for work that did not require more than entry-level skills.

It only took a few minutes to learn one’s job on an assembly line in the first industrial revolution, and many workers recoiled from the sheer boredom and physical repetitiveness of this work. This is one reason why Henry Ford famously raised his workers’ wages to the then-princely sum of $5/day: the high turnover of people quitting was killing him.

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Technology, Competition and the ‘Crapification’ of Jobs

Two recent articles shed light on the ‘crapification’ of jobs and the rise of income inequality:

Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs (Naked Capitalism)

The Measured Worker: The technology that illuminates worker productivity and value also contributes to wage inequality. (Technology Review, via John S.P.)

While both articles offer valuable insights into the secular trend of stagnating employment and wages, I think both miss a couple of key dynamics.

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Sorry, Fed Inflationistas: Technology Is Deflationary

Technology, like Nature itself, has no emotional stake in what is creatively destroyed.

We all know the Federal Reserve is terrified of deflation, because they keep telling us that deflation is the equivalent of death and inflation is the equivalent of oxygen. What they fail to mention is that inflation is only oxygen for debtors barely able to service their debt and those who profits from debt, i.e. bankers and financiers.

For everyone earning a wage or salary, inflation is the equivalent of death by a thousand cuts and deflation is the elixir of life. When prices decline, our money goes further, i.e. our purchasing power increases.

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Clearing Billions in Profit Is About to Get Much Harder

The math of netting $1 billion is daunting.

The mainstream financial media nearly wet its collective pants with excitement in reporting that the planet’s corporations paid $1 trillion in dividends in 2013. What they didn’t report is that clearing billions in profit is about to get much harder.

As a refresher, let’s look at what it takes to net $1 billion in net profit.

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Why Banks Are Doomed: Technology and Risk

It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

The entire banking sector is based on two illusions:

1. Thanks to modern portfolio management, bank debt is now riskless.

2. Technology only enhances banks’ tools to skim profits; it does not undermine the fundamental role of banks.

The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. If you want to understand why risk cannot eliminated, please read Benoit Mandelbrot’s book The (Mis)Behavior of Markets.

Technology does not just enable high-frequency trading; it enables capital and borrowers to bypass banks entirely. I addressed this yesterday in Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated.

Unfortunately for banks, higher education, buggy whip manufacturers, etc., monopoly and propaganda are no match for technology. Just because a system worked in the past in a specific set of technological constraints does not mean it continues to be a practical solution when those technological constraints dissolve.

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Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated

What else can we do with the $1.25 trillion we’ll save by eliminating these obsolete financial middleman parasites? A lot.

Technology has leapfrogged the banking sector, rendering it as obsolete as buggy whips. So why are we devoting 9% of our economy to an obsolete parasite?Financial sector profits now total a staggering 4.5% of GDP (gross domestic product), while the expenses generated by financial churning account for another 4.5% of the economy.

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