The Economy: Why It's Different This Time

Excerpt from This Isn't Just Another Crash, by Charles Hugh Smith

1. Households have never been so dependent on debt as a substitute for stagnating wages.

2. Real earnings (adjusted for inflation) have never been so stagnant for the bottom 90% for so long.

3. Corporations have never been so dependent on debt (selling bonds or taking on loans) to fund money-losing operations (see Netflix) or stock buybacks designed to saddle the company with debt service expenses to enrich insiders.

4. The stock market has never been so dependent on what amounts to fraud — stock buybacks — to push valuations higher.

5. The economy has never been so dependent on absurdly overvalued stock valuations to prop up pension funds and the spending of the top 10% who own 85% of all stocks, i.e. “the wealth effect.”

6. The economy and the stock market have never been so dependent on central bank free money for financiers and corporations, money creation for the few at the expense of the many, what amounts to an embezzlement scheme.

7. Federal statistics have never been so gamed, rigged or distorted to support a neo-feudal agenda of claiming a level of wide-spread prosperity that is entirely fictitious.

8. Major sectors of the economy have never been such rackets, i.e. cartels and quasi-monopolies that use obscure pricing and manipulation of government mandates to maximize profits while the quality and quantity of the goods and services they produce declines.

9. The economy has never been in such thrall to sociopaths who have mastered the exploitation of the letter of the law while completely overturning the spirit of the law.

10. Households and companies have never been so dependent on “free money” gained from asset appreciation based on speculation, not an actual increase in productivity or value.

11. The ascendancy of self-interest as the one organizing directive in politics and finance has never been so complete, and the resulting moral rot never more pervasive.

12. The dependence on fictitious capital masquerading as “wealth” has never been greater.

13. The dependence on simulacra, simulations and false fronts to hide the decay of trust, credibility, transparency and accountability has never been so pervasive and complete.

14. The corrupt linkage of political power, media ownership, “national security” agencies and corporate power has never been so widely accepted as “normal” and “unavoidable.”

15. Primary institutions such as higher education, healthcare and national defense have never been so dysfunctional, ineffective, sclerotic, resistant to reform or costly.

16. The economy has never been so dependent on constant central bank manipulation of the stock and housing markets.

17. The economy has never been so fragile or brittle, and so dependent on convenient fictions to stave off a crash in asset valuations.

18. Never before in U.S. history have the most valuable corporations all been engaged in selling goods and services that actively reduce productivity and human happiness.

Related: 
ZH: "Unprecedented" - Companies Slashed Over 20 Million Jobs In April, ADP

Canadian Economics: Lies by the Government Paid for by the Public

The Canadian Broadcasting Corporation (CBC) is an agency for the deception of the public at public expense. Almost any snatch of a CBC news broadcast or public policy discussion will, on examination, be found to encapsulate a lie.

A meme currently being foisted on the public by the CBC is that trade protectionism hurts the public by raising prices. The inference being that higher prices due to trade protectionism hurt every Canadian.

That is the lie.

The purpose of trade protectionism is to raise wages of people who will produce the goods that would otherwise be imported from collapsible factories in Bangladesh, Chinese electronics assembly plants with anti-suicide nets, etc. So yes, tariffs raise prices but they also raise incomes of working people. So trade protectionism makes many working people better off at the expense mainly of those in the FIRE and globalized sectors of the economy. Protectionism would also allow Canada to rebuild some of its battered manufacturing sector that was undermined by NAFTA and devastated by free trade with the sweat-shop economies.

Yes protectionism results in retaliatory measures, but what do low-wage economies buy from Canada? Not much. Seventy-seven point four percent of Canadian exports go to the US and Mexico which are largely free of protectionist tariffs against Canadian goods. The rest consists in those incredibly cheap  shoes and shirts, and omputers and car parts that Canadians used to make for one another but now buy in large quantities from exploiters of sweated Asian labor.

In fact, a protected US Market to which Canadians have free access by virtue of the NAFTA agreement would provide huge opportunities for Canadian manufacturing.

Getting the Relationshiop Between Economic Theory and Economic Performance Arse-Backwards

Over at the Unz Review, Eamonn Fingleton argues that Donald Trump will beat the Heck outa Hillary because he understands the economy, whereas she has been closely connected with the ruling elite that, for 25 years, has failed to understand, or therefore prevent, the disaster of American deindustrialization and off-shoring of jobs, a failure Fingleton attributes to faulty economic assumptions. In particular, he says:

Anglophone textbooks have traditionally identified just three key factors of production – capital, labor, and land. Now a further factor has emerged that plays a decisive role in the relative competitiveness of modern nations, blah, blah blah. 

And until now, nobody knew this? As if.

No, the idea that America’s economic decline can be attributed to bad economics has things arse-backwards.

As Harvard economist J.K. Galbraith made clear decades ago, the function of economics is not to steer the economy but to rationalize for the public whatever direction the elite has decided the economy must go.

Today, globalization, i.e., destruction of the democratic, sovereign nation state, accompanied by the concentration of power in the hands of bankers and oligarchs operating via global institutions such as the UN, the WTO, etc., etc., is the objective to be concealed. Economists, liberally rewarded with newspaper columns, Nobel prizes, extremely lucrative textbook contracts (at the expense of students required to purchase their outrageously expensive and essentially worthless books) and Ivy League university chairs, merely provide the cover up.

So Western elites are not wrong about the economy, they just don’t care about the economy as a source of income to the masses. What they care about is the continued concentration of wealth under their own control or the control of those who pull their strings.

That their policies undermine Western prosperity and power means nothing to them. The end game is global governance mediated by local governments subject to corporate control via trade agreements, and global institutions.

Hence Obama’s notice to the British: “sovereignty is obsolete,” which is to say: "I declare your independence as a democratic nation state finished." And the same goes for American sovereignty. National governments must no longer serve the people, they must serve the Treason Party representing the plutocratic global elite. 

The key question about Trump is whether he is a true American patriot or a covert Treason Party alternative to the discredited Bush-Clinton duopoly. The answer to that question will likely determine not only the fate of the European people as a racial and cultural group, but whether we are to have peace or war with Russia and China.

What Accounts for the Past 500 Years of Western Global Dominance? Race, Culture or Blind Chance?

By Canspeccy

I have no sympathy for the imperialist enthusiasm of Oxford cum Harvard and Stanford Professor, Niall Ferguson. I am prompted, however, to come to his defense in the face of a viciously false allegation of white supremacism by a Pankaj Mishra, a cousin-in-law to the pseudo-Conservative and imperialist war criminal British Prime Minister, David Cameron.

Mishra's contemptible smear was published by the London Review of Books under the guise of a review of Ferguson's book, Civilization: The West and the Rest.

Mishra is a skilled exponent of defamation by insinuation.

Ending unemployment. Part 1: The Negative Income Tax

Image source

The US economy is contracting. US unemployment is at an all time, post-WW2 high of around 18% when discouraged workers and workers only partially employed are included (US Bureau of Labor Statistics: U6 measure of unemployment).

How is it that people who are able to work, who want to work and who need to work, cannot work?

Because no one wants to hire them.

Why does no one want to hire them?

Because folks borrowed too much during the FED-driven housing boom, and are now paying down their debts as their assets, particularly houses, decline in value.

This debt deleverage means reduced consumption, reduced consumption means reduced demand for labor.

The result: idle workers, idle factories, underutilized public infrastructure.

The Keynesian solution?

Increase aggregate demand by deficit government spending covered by money printing.

Is this bad?

In theory, not necessarily. In practice, almost certainly.

Why is it good in theory?

Because it can create something of value from resources that would otherwise be wasted.

Why is it almost certainly bad?

Because government spending is almost always hugely wasteful. As a consequence, money is spent but little if any benefit results. The expenditure must, nevertheless, be paid for by someone, and it is normally paid for by the employed workforce through the inflation tax: the money the government printed to pay for the deficit spending creates inflation that cuts the value of the money that those with jobs are able to earn.

In theory, as noted, this need not be the case. If deficit spending resulted in some new and valuable public infrastructure that increased the productivity of the work force, the efficiency of energy use, or the quality of life, the cost would be recovered in kind. This, however, rarely occurs due to corruption, ineptitude and the near universal lack of imagination in the administration of government programs.

The inflationary effect of deficit spending can to some extent be limited by tax cuts that stimulate the supply of goods and services. This phenomenon was recognized during the Reagan era (supply side economics), and has since been applied to limit the inflationary impact of Keynesian policies.

But whatever the potential benefits, the Keynesian response to unemployment is of diminishing effectiveness in a globalized world economy where jobs in high wage economies are off-shored to places were labor can be had for pennies an hour. Deficit spending simply means bigger trade deficits as increased consumption sucks in cheap consumer goods from abroad, with little impact on domestic manufacturing employment.

What alternatives are there?

The Austrian economists say, let those who borrowed too much go broke, so that the assets they control — land, houses, businesses, etc. —can be acquired by better managers for pennies on the dollar. Then with indebtedness slashed, and mismanaged assets redeployed, the economy will grow and unemployment will fall.

There is undoubtedly merit in this approach. It keeps bankers honest by making them vulnerable to failure as the price of reckless lending, it makes borrowers cautious in the knowledge that there is no government safety net should their speculative ventures fail, and it makes savers disinclined to deposit their money with any but the most conservatively managed banks.

The problem with the Austrian "solution" is that in the process of renewal through widespread bankruptcy, banks would go under, savers would be wiped out and most wealth would end up in the control of a handful of astute speculators who might have little interest in reviving the consumer society.

The effect of the Austrian "solution" applied without restraint would likely be a catastrophic depression followed by massive social unrest, if not war or revolution.

Is there another approach?

Yes.

If it's jobs that are needed, governments should pay for them directly.

How?

Easily enough!

First, eliminate minimum wage laws.

Second, extend the income tax table into negative territory.

Earn less than a living wage? Then the IRS will supplement your income to enable personal and family survival.

How much would this cost?

Not as much as you might think.

Let us suppose that all 30 million unemployed Americans (US Labor Department U6 definition of unemployment) were able to find work at a wage between one cent per hour and the minimum Federally established living wage, which we will take to be $8.00 per hour (with variation according to circumstances, such as dependents, place of residence, etc.). Let us suppose that on average, these workers are able to command a market wage of only half the Federally established living wage. In that case, the Federal wage subsidy would be, approximately, $6,400 per person per year, or a total program cost of $192 billion per year, or about 7% of the 2011 US Federal Budget.

Seven percent of the 2011 US Federal Government budget is not chicken feed. But it's a lot less than the $700 billion banksters' bail out fund. And from it would be deducted substantial amounts that would otherwise have had to be spent on food stamps and other welfare programs, law enforcement, prisons, mental healthcare, and other costly consequences of mass unemployment.

Furthermore, the availability of 30 million American workers at third-World wages would provide American industry a huge shot in the arm, allowing many producers to repatriate jobs, capital and technology presently off-shored to India, China, and other low wage countries.

An expansion in American manufacturing and revival at home of off-shored or outsourced service industries would add substantially to US corporate profits and thus to US Government tax revenues.

So why is this solution not adopted?

Because Wall St. owns the Government and Wall St. wants the Austrian solution.

It's interesting. The top financial entities can borrow ten-year funds at rates as low as 1.75%. So what's to stop the financial elite borrowing the funds to buy up the stock market -- at least that part of it with decent income. BP, for example, with a price to earnings ratio currently at 5.6 looks like a good bet.

At, say, 3% you could finance the purchase of BP, which has yearly earnings of $20 billion, for a mere $3.7 billion per year.

Cool, hey. Let those dumb unemployed Americans starve.

But hold it. We can buy cheaper than this. See there's a run developing on the European banks. Talk it up. Panic, everybody. Just a few million more unemployed. A big bankruptcy. A Greek default. Yay, we'll own everything for really, really cheap.

See also:
Ending unemployment. Part 2: Tradeable Wage Subsidies
Why economics is bunk
America's inflationary depression
USA versus China: Wage Convergence, Wealth Divergence and Global Hegemony
US Economy: Expecting the Unexpected
USA Boom or Bust: The Next Decade
Why China Booms While America Slumps
China's Economy Already Larger Than America's

Don't worry: The US aint going broke til the Fed runs out of digits

Moody's place US on downgrade watch, warns the Drudge Report.

Moody's, that's the privately owned ratings agency that gave triple-A ratings to all those crap mortgage bonds.

In fact, Moody's are so useless, they even downgraded themselves.

LOL.

The truth about this and all financial news was revealed to me when I was a kid, and a friend, the son of the CEO of a well-known multinational corporation, explained to me that the only reason any sensible person attends a cocktail party is to hype stocks they intend to sell in the morning and trash stocks they want to buy in the morning.

That, chiefly, is the function of the financial news. Plus it fills the space between the ads on the business pages of the newspaper and creates market volatility, which drives up market volumes, which keeps the brokers in funds.

The truth about the US Government's credit status is that it cannot default on its debts as long as they are denominated in US dollars, because the US Government, with the collaboration of the Fed, prints its own money. That means US Government debt will always be redeemed at full face value, either with crisp newly printed US dollars, or with funds raised by rolling over the debt through the issue of new bonds.

But what about the "debt ceiling?"

In theory, Congress has the power to deny the US Government the freedom to print money, aka, quantitatively ease. But this they will never do, unless they wish to create a financial crisis, which will help fill the space between the ads on the business pages of the newspaper, and creates market volatility, which -- oh, but I said that before.

Of course there are folks who don't like to see the US print money, but so what?

The Chinese see that printing dollars lowers the value of those already printed, of which the Bank of China owns a trillion or more. But again, so what?

If the Chinese don't like seeing the value of their dollars depreciated, they know what to do: spend 'em now, which of course would be great for the US economy.

Let's see, how could America's foreign creditors, who own about four-and-a-half trillion dollars worth of Treasury debt instruments, spend their dollars?

I'd suggest the stock market. At current prices they could pick up America's top 20 corporations, including Exxon, Apple, Microsoft, Chevron, GE, IBM, Berkshire Hathaway, etc.

Or they might consider farm land. The US has about a billion acres, so at an average of $4500 per acre, America's foreign creditors could pick up the entire cultivable portion of the United States.

But they might prefer urban real estate, in which case they might pick-up all of the 14 million empty houses in the US (estimated value around $2 trillion), or some other component of America's $20 trillion worth of commercial and residential real estate.

A serious attempt by America's foreign creditors to do any of the above  would obviously have a variety of interesting repercussions.

With all that cash flowing into circulation, the US economy would experience an explosive boom.

Stocks would zoom: Dow 35,000 here we come.

Real estate would rebound. Crap mortgage bonds would soon be fully valued. Bail-out funds loaned by the Fed to banks would be repaid.

Inflation would roar as happy home-owners and stockholders once again enjoyed the wealth effect.

The dollar would fall, curbing imports, boosting exports.

Unemployment would fall. Government welfare expenditures would fall. Government revenues would rise. Deficits would be eliminated and the Fed would engage in repeated action to slow the boom.

Yes, as long as the US remains mired in the recession, raising the debt ceiling and printing more money is the only way to go. For those with US dollars, the best bet is to invest them in real assets (stocks, land, oil, etc.) or spend them now, which is good not only for those who spend but for the US economy too.

USA Boom or Bust: The Next Decade

Hooverville of the 21st Century

Will the U.S. economy ever recover?

"I'm a huge bull on America" declared Warren Buffett in September 2010, while ruling out the possibility of a double dip recession.

But 48% of Americans think America is already entering the next great depression.

And they, according to Bill Bonner, are optimists who have failed to notice that America has been in a recession for the last ten years, with no sign of a letup for many years to come.

Who to believe?

Perhaps everyone's right.

Bonner appears to be correct in saying the US GDP has gained flip all in the last ten years.

Self-employment: USA 2011

Meantime, unemployment, homelessness, and outright poverty have become widespread features of the American economic landscape.

And as millions of the unemployed run out of unemployment benefits, while losing hope of reemployment, and as millions more illegal immigrants flood in, the outlook for tens of millions of Americans becomes increasingly grim.

But on the bright side, corporate profits have never been higher. Since the low of 2002, IBM's share price is up 300%, Apple's is up 3000% (yes that's right, three thousand percent), and even the Dow and Buffett's stodgy Berkshire Hathaway are up 50%.

So what is going on, and why?

Two words that I've never heard Warren Buffett use explain it: "outsourcing" and "off-shoring".

What these words mean for the American economy I have already discussed in Why China Booms While America Slumps. But the chief point is made in two sentences:

In 1993 Chinese wages were about 3% of those in America.

and since 1993,

Chinese manufacturing wages have been driven up only marginally, reaching US$134 per month in 2004 or just 4.9% of the US rate of US$2732 per month.

Here lies the answer to the dichotomy of view between Buffett and the common man.

As David Ricardo explained:

As the wages of labour fall, the profits of stock rise, and they be together always of the same value...

Cheap labor in China and throughout the developing world means mega profits for American business and poverty for a tens of millions of Americans, and the hardship for millions of Americans is made worse by minimum wage laws that prevent those with skills of limited value from competing on price with Asian, African or Middle-Eastern labor.

Corporate profits hit a record high in 2011

How will this end?

Two possibilities:

(1) Revolution.

(2) Wage equilibration in the tradable goods and services sectors of the economy between America and other Western economies, on the one hand, and the developing world on the other hand, which would mean a fully globalized economy with American living standards more or less matching those in Shanghai, Mumbai, Istambul and Cape Town.

The second alternative is clearly the objective of the ruling elite. So how will the transition be accomplished?

Wages, as Lord Maynard Keynes observed, are sticky on the downward side. Inflation is therefore almost certainly necessary to achieve the transition. This cuts real wages without lowering the dollar amounts paid in wages. It is achieved by printing dollars.

The printing press provides a technology that Ben Bernanke's Fed is proud to possess. We have seen QE 1, aka Money Printing 1, and QE 2. In due course expect to see QE 3, 4, 5 ...

As dollars spew out, the exchange value of the US dollar will fall. It has been falling for years, but now it should fall faster. The result should be a fall in the price of American exports in terms of other currencies and a rise in the cost of America imports in terms of dollars. The net effect should be a gradual restoration of American manufacturing with increasing exports and declining imports.

Trouble is, China, now the workshop of the World, is inflating as fast as Ben Bernanke can crank the press at the Federal Reserve. Net result? Chinese imports remain just as competitive in the American market as before.

What to do? Print even more US dollars.

This will be bad for China, since it will depreciate the hoard of dollars they have accumulated to prevent the Renmimbi from rising against the dollar. It'll serve them right.

Chart source: Shadow Government Statistics

But it will be good for many US equities, though not necessarily for those in the consumption sector, since American consumption is about to undergo a permanent decline.

And it will be very bad for those with cash.

Is gold an alternative?

Maybe.

But remember, gold is not money. No one is promising to pay the bearer any particular number of dollars for an ounce of gold.

The price of gold is the creation of market psychology. At six times the price of only a decade ago, the price of gold could crater anytime.

See also:
Why China booms while America slumps
America's inflationary depresssion