USA in a Debt Trap Death Spiral

Posted on June 27, 2018 by Reid Mukai

By F. William Engdahl

The US economy and its financial structures have never recovered from the great financial meltdown of 2008 despite the passage of ten years. Little discussion has been given to the fact that the Republican Congress last year abandoned the process of mandatory budget cuts or automatic sequestration that had been voted in a feeble attempt to rein in the dramatic rise in US government debt. That was merely an added factor in what soon will be recognized as a classic debt trap. What is now looming over not just the US economy but also the global financial system is a crisis that could spell the end of the post-1944 dollar system.

First some basic background. When President Nixon, on advice of Paul Volcker, then at US Treasury, announced on August 15, 1971 the unilateral end of the Bretton Woods gold-dollar system, to replace it with a floating dollar, Washington economists and Wall Street bankers realized that the unique role of the US dollar as leading reserve currency held by all central banks and the currency for world commodity and other trade, especially oil, gave them something that appeared to be a gift from monetary heaven.

So long as the world needed US dollars, Washington could run government deficits without end. Foreign central banks, especially the Bank of Japan in the 1980’s and since the turn of the century, the Peoples’ Bank of China, would have little choice but to reinvest their surplus trade dollar earnings in interest-bearing AAA-rated US Treasury securities. This perverse dollar system allowed Washington to finance its wars in faraway places like Afghanistan or Iraq with other peoples’ money. During the Administration of George W. Bush, when Washington’s annual budget deficit exceeded annually one trillion dollars, Vice President Dick Cheney cynically quipped, “debt doesn’t matter; Reagan proved that.” Up to a point that appeared so. Now we are getting dangerously near to that “point” where debt does matter.

Federal Debt Rise

There are generally speaking three major divisions of debt measured in the US economy: Federal debt of Washington, corporate debt and private household debt. Today, owing in large part to ten years of historic low interest rates following the largest financial crisis in history–the 2007-2008 sub-prime crisis that became a global systemic crisis after September 2008–all three sectors have borrowed as if there was no tomorrow because of the near-zero Federal Reserve interest rates and their various Quantitative Easings. Nothing so radical can last forever.

Since the financial crisis erupted in 2008 US Federal debt has more than doubled from $10 trillion to over $21 trillion today. Yet conditions were made manageable by a Federal Reserve emergency policy that dealt with the financial and banking crisis by buying almost $500 billion annually of that debt. Much of the remainder was bought by China, Japan and even Russia and Saudi Arabia. Further debt levels were restrained by the bipartisan spending caps established in the Budget Control Act of 2011 that had kept recent deficits partially in check.

Now conditions of future US Federal debt and deficit growth are pre-programmed for systemic crisis over the next several years.

‘Trumponomics’ Disaster

The economics of the Trump Tax Cuts Act of 2017, signed in December, dramatically cut certain taxes on business corporations from 35% to 21%, but did not offset that with revenue increases elsewhere. The promise is that cheaper taxes will spur economic growth. This is a myth under present economic conditions and overall public and private debt burdens. Instead, the new tax law, assuming ideal economic conditions, will decrease expected revenues by a total of $1 trillion over the next 10 years. If the economy goes into severe recession, highly likely, tax revenues will plunge and the deficits will explode even more.

What the new Trump tax cut act will do is dramatically increase the size of the US annual budget deficit. The Congressional Budget Office estimates that as early as Fiscal Year 2019 the annual deficit that must be financed by debt will reach $1 trillion. Then the Treasury Borrowing Advisory Committee expects government debt issues of $ 955 billion for FY2018, compared with $ 519 billion in FY 2017. Then for FY 2019 and 2020 the deficit will exceed $1 trillion. By 2028, ten years from now, under mild economic assumptions, the size of the USA Federal debt will rise to an untenable $34 trillion from roughly $21 trillion today, and the deficit in 2028 will exceed $1.5 trillion. And this year 2018 alone, with historically low interest rates the cost of interest only on the total Federal debt will reach $500 billion.

Zombie borrowers…time bombs

Now after almost a decade of unprecedented low interest rates to bail out Wall Street and create new asset inflation in stocks, bonds and housing, the Fed is in the early stages of what some call QT or Quantitative Tightening. Interest rates are rising and have been for the past year, so far very gradually as the Fed is being cautious. The Fed however is continuing to raise rates, and now the Fed Funds stands at 1.75% after nearly ten years at effectively zero. Were they to stop now it would signal a market panic that the Fed knew something far worse than they say.

Because never in its history has the Federal Reserve indulged in such a monetary experiment with so low rates so long, the effects of reversing are going to be as well unprecedented. At the onset of the 2008 financial crisis the Fed rates were around 5%. That is what the Fed is aiming at to return to “normal.” However, with rising interest rates, the lowest credit sector, so-called non-investment grade or “junk bonds” face domino style defaults.

Moody’s Credit Rating has just issued a warning that, barring some sort of miracle, as US interest rates rise, and they are, as much as 22% of US corporations that are being kept alive borrowing at historically low interest, not only in shale oil but in construction and utilities, so-called “zombie” corporations, will face an avalanche of mass defaults on their debt. Moody’s writes that, “low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors.” The Moody’s report goes on to state some alarming numbers: since 2009, the level of global non-financial junk-rated companies has soared by 58%, representing $3.7 trillion in outstanding debt, the highest ever. Some 40%, or $2 trillion, are rated B1 or lower. Since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion. Much of that debt has been used to fund stock repurchases by the companies to boost their stock price, the main reason for the unprecedented Wall Street stock market bubble.

Fully 75% of federal spending is economically non-productive including military, debt service, social security. Unlike during the 1930s Great Depression when levels of Federal debt were almost nil, today the debt is 105% of GDP and rising. Spending on national economic infrastructure including the Tennessee Valley Authority and a network of federally-build dams and other infrastructure resulted in the great economic boom of the 1950s. Spending $1.5 trillion on a dysfunctional F-35 all-purpose fighter jet program won’t do it.

Into this precarious situation Washington is doing its very best to antagonize the very countries that it needs to finance these deficits and buy the US debt—China, Russia and even Japan. As financial investors demand more interest to invest in US debt, the higher rates will trigger the default avalanche Moody’s warns. This is the real backdrop to the dangerous US foreign policy actions of the recent period. No one in Washington seems to care and that’s the alarming fact.

The US Middle Class is Shrinking and Moving Towards a “Dual Economy”

Posted on February 8, 2018 by Reid Mukai

MIT Economist Peter Temin, the author of “The Vanishing Middle Class,” explains how the US is moving towards two economies, one for the lower 80% and one for the upper 20%

By Gregory Wilpert and Peter Temin

Source: Real News Network

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert, coming to you from Quito, Ecuador. Inequality in the world, and specifically in the United States, has been gaining more and more attention recently. Last week, the Pew Research Center, released a new study on the size of the middle class in the U.S. and in ten European countries. The study found that the middle class shrank significantly in the U.S. in the last two decades from 1991 to 2010. While it also shrank in several other Western European countries, it shrank far more in the U.S. than anywhere else. Meanwhile, another study also released last week, and published in the journal Science, shows that class mobility in the U.S. declined dramatically in the 1980s, relative to the generation before that. Finally, a book released last March by MIT economist Peter Temin argues that the U.S. is increasingly becoming what economists call a dual economy; that is, where there are two economies in effect, and one of the populations lives in an economy that is prosperous and secure, and the other part of the population lives in an economy that resembles those of some third world countries. Joining us to talk about all of this from Cambridge, Massachusetts, is Professor Temin, the author of the book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy. He is Professor Emeritus of Economics at the Massachusetts Institute of Technology. Thanks, Professor Temin, for making the time to talk about your book today.

PETER TEMIN: Okay. Thank you. Glad to be here.

GREGORY WILPERT: You begin your book with an analysis of the middle class, kind of like what the Pew study does that I mentioned in my introduction. You show that the middle class’s income, as a percentage of all incomes, has been shrinking between 1970 and 2014. At the same time, the upper class income grew significantly. I want to ask first, how do you define the middle class, and what conclusions did you draw from the shrinking income of the middle class?

PETER TEMIN: Okay. I’ve taken my definition from the Pew Research Service. In a slightly earlier episode, they showed that the middle class was losing out. That’s the first figure in my book. And it’s defined to be from two-thirds of the median earning to twice the median earning. The median earning are the earnings of a person who is mid-way among all the incomes received by people in the United States. And so that’s kind of the middle person there, and that’s why this is called the middle class, deviating up and down around that middle person. And then… okay. The new study uses after-tax disposable income, whereas the previous study that I did used before-tax income; and so that that makes a little difference in the numbers, but the effects are exactly the same. The middle class is shrinking in the United States; and I argue in my book that this is an effect of both the advance of technology, and American policies. That is shown dramatically in the new study, because the United States is compared with many European countries; and in some of them, the middle class is expanding in the last two decades, and in others it’s decreasing. And while technology crosses national borders, national policies affect things within the country. I argue that, in the United States, our policies have divided us into two groups. Above the median income – above the middle class – is what I call the FTE sector, Finance, Technology and Electronics sector, of people who are doing well, and whose incomes are rising as our national product is growing. The middle class and below are losing shares of income, and their incomes are shrinking as the Pew studies, both of them, show. And I argue… Oh, okay. Go ahead.

GREGORY WILPERT: Yeah. No, I was just going to say, before we go into the issue of the dual economy, I just wanted to look at some of the explanations for what has been happening. That is, you show another interesting graph which shows the relationship between the average wages and productivity between 1945 and I think it was 2014; and it clearly shows that while the two lines productivity and average wages grew in parallel from 1945 to the 1970s, after the 1970s they began to diverge very strongly; and wages remained stagnant while productivity continued to increase at the same rate as before. What is the significance of this divergence and why do you… why would you say that these two lines have begun to diverge?

PETER TEMIN: Okay. They diverged in the 1970s by policies that were the result of a backlash against the civil rights revolution of the 1960s. And so the policies were against unions; were a reorganization of industry and a variety of things on that side. They were also the result of decontrol of the national economy. It started under President Nixon, and then were expanded greatly under President Reagan in the early 1980s. But the wage divergence from the overall productivity began almost immediately. And the progress that came was partly electronics and the things that we know about communication, that allowed businesses to control the activities of people, and allowed, then, large firms to spin off a variety of their activities; So that instead of making a wage decision about their ordinary, less-skilled workers, they made a purchasing decision to hire a company that supervised these people. And that was good for the company, because it emphasized their core value, and was reflected in their share price and in the stock market. But it was bad for consumers, because… or workers, because there was an ethical… an equity consideration on wage decision, where wages of the less-skilled workers were to keep up with the wages of the highly-skilled ones; but a purchasing decision, or a sub-contracting decision; and none of these equities avail.

GREGORY WILPERT: I just wanted to turn to now the question about the dual economy. I mean, it was established… or you’ve established that the middle class is definitely shrinking across… according to these other studies. But how do you reach the conclusion that there are two economies in the U.S., that is, a dual economy? I mean, after all, why not talk about perhaps a triple economy: one for the poor, one for the middle class, and one for the upper class? Why a dual economy?

PETER TEMIN: Well, I used that model because the model – which is an old model from the 1950s – shows that the FTE sector makes policy for itself, and really does not consider how well the low wage sector is doing. In fact, it wants to keep wages and earnings low in the low wage sector, to provide cheap labour for the industrial employment. But the people in the United States, in the FTE sector, are largely ignorant of what’s going on in the low wage sector. For example, about this time also started an increase in criminal employment, resulting now in the United States having more people in prison, relative to its population, than any other advanced country in the world. And most people in the FTE sector are not aware of this. Prisons are located in rural areas; the judicial processes take place there; and people are not conscious of this at all. But having a lot of people in prison then rebounds badly on public education in the neighborhoods that the people come from. And the discussion of urban education never refers to mass incarceration. It doesn’t really provide any extra resources to compensate the kids who are involved – who are affected by having so many adults in prison. And so the dual economy helps to take these disparate things about mass incarceration, and education, and see the connections between them.And the connections, I argue, are because the dual economy they are in their own dual economy and they make rules, and laws, and so on, for their own benefit, and are punitive or neglectful of things going on in the low wage sector.

GREGORY WILPERT: Well, unfortunately, we need to stop here for the end of the first part of our interview with Professor Temin, the author of the book, The Vanishing Middle Class: Prejudice and Power in the Dual Economy. We will return for the second part. We’ll also explore some of the reasons for how this was possible; also particularly that this 20% – or the upper part of the dual economy – is able control the economy to such a large extent, and the politics. So make sure you watch the second part of our interview here on The Real News. Thanks, Professor Temin, and we’ll connect again in a couple of minutes for the second part.

PETER TEMIN: Okay. Thank you.

GREGORY WILPERT: And thank you for watching The Real News Network.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert, coming to you from Quito, Ecuador. This is Part 2 of our interview with Professor Temin, the author of the book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy. Thanks again for being here, Professor. P

ETER TEMIN: Okay. Thank you.

GREGORY WILPERT: You developed the rather provocative thesis that we started talking about in the first part of this interview; about that the bottom 80%, more or less, are beginning to live in very separate and different conditions from the other, the top 20%; and that this bottom 80% lives in conditions that begin to resemble more those of a third world country, than those of a first world country. Explain that a little bit more. How is it that… I mean, what makes this lower 80%’s living conditions resemble those of a developing country more than a developed country, such as we usually think of?

PETER TEMIN: Okay. I thank you. Well, I mentioned in the first part that urban public education was in crisis. And so that’s one way you can see this; that where the rich people live in the suburbs around public schools are fine you know, they have their problems, but they’re good schools but in the inner cities, they are starved of funds and having problems. This results, in part, from the great migration, where African-Americans moved out of the South – and the New Jim Crow that they were subject to in there – into the North. And court decisions, Supreme Court decisions in the 1970s, deprived the inner cities of funds. Now, in addition to education, if we take infrastructure, and think about public transportation in the cities; that the rail systems that served the larger cities – you know, the ones … Boston, New York, Washington – are aging, and they are beginning to break down. And yet nothing is being done to really help them. The American Society of Civil Engineers gave the United States a D-minus that is, almost failing – grade for its infrastructure. Going up from subways and things; if we think of rail tunnels, Governor Christie, some years back, halted a program to build another tunnel under the Hudson River from New Jersey to New York, to enable cars and trains to go from where people could afford to live with where they were working; and so that results in much congestion and delays and problems in getting there. On the roads, also in urban roads, there are lots of potholes and so you have to drive carefully. Very much, I had better roads in Guatemala when I was there some years ago, it seems to me. Although there were some problems there, so I don’t want to say they were great roads. But of course there wasn’t as much traffic on the roads, so it was easy to avoid…

GREGORY WILPERT: Sorry. One thing that I’m wondering about, though, is… I mean, you kind of mentioned this, or alluded to it, in the first part; which is this kind of strange phenomenon where… I mean, 80% make up a vast majority of the population, yet they’re suffering from the policies that are determined by the top 20%. Supposedly — or presumably — the United States is a democracy. How is it possible, then, that we live in such a dual economy, in which the 80% don’t get a chance to change the policies that are contributing to this, so to speak, the dualization, if you will, of the economy?

PETER TEMIN: Yes. That is the big question. But another Supreme Court decision decided that money was speech; and therefore the constitutional grant that there should be freedom of speech, meant that there should be freedom of people to spend money to support political candidates. And that has resulted in a tremendous increase in the amount of money going into politics. And so the influence of this money has pushed the representatives who make the decisions toward being responsive to the upper… the FTE sector, rather than the desires of the voters. And many political scientists have found that congressional decisions — the policies that come out of congressional action — are in fact responsive more toward the moneyed group of people than they are toward the majority. And so this is coupled with another Supreme Court decision that gutted the part of the Voting Rights Act from the 1960s that’s in the civil rights revolution that allowed the federal government to suspend state actions, mainly in the South where the Confederacy was, but some in the North too. That was eliminated, and so voter suppression has increased. And the way after the civil rights movement, we can’t talk about whites versus blacks as they did earlier; but you have code words that you say; for example, that several states are flirting at the moment with requiring a photo ID in order to vote. And I heard on the radio, when this was being discussed, that one of the commentators said, “Oh, yes, well, that’s no problem. Everybody has a photo ID.” Everybody in the upper sector has a photo ID, because that person has a driver’s license, or a passport, or something else related to their employment. But in the lower sector, a lot of poor people do not have photo ID; because they don’t have cars; because they use the subways, that I say are now in trouble; or they’re rural; or all kinds of reasons why poor people don’t have photo ID. But that’s a coded word for keeping African-Americans from voting. And the policies are directed towards all poor people, so they keep Latinos from voting, and they keep poor whites from voting.

GREGORY WILPERT: Sorry just before we finish up I just want to quickly touch on the issue of the policy recommendations that you develop in your book. In order to get the U.S. out of the dual economy, what kinds of measures could be taken just very briefly?

PETER TEMIN: Well, the most important one, and the one I listed first, was to improve public education.That is to say, in the model that I’m using, the transition – which you say is getting harder in the United States because of the growing inequality of income - the primary way of getting from the low wage sector into the higher sector is through education. But education requires a lot of commitment on the part of the families being educated, and a lot of support from the government, which it is not getting at this point. Support should start really with early education — the mayor of New York is trying to have early education start at three years old, and that is a very good measure; I don’t know how successful he will be; but it’s a move in the right direction – to compensate for the fact that in the upper sector children grow up with books all around them. In the lower sector, children have often not even seen books until they get to school. And so there is a whole question of acculturation to academic study for these poorer people. That is to say, that urban public schools need to have more resources than suburban schools – which serve the higher people in the higher sector – but in fact now they get fewer resources per student. And this education needs to be continued through schools; through primary school, secondary school; and then to get into the higher sector, you really need to go on to college. And college, a generation ago, let’s say before the 1970s, was open, because every state had a state university with essentially free tuition. Now, the states have withdrawn from supporting the state university, and so most of the revenue of the state universities comes from private sources; and they need to raise tuition on the student to keep the college operating. Now, when poor people try to go to college, they don’t have the money, and there are none of these free colleges available for them. They need to borrow money. And the amount of educational loans has skyrocketed in the last several decades; and so the problem of student debt is second only to the problem of mortgage debt in the United States.And the oppression of having large student debts keeps people youngsters from trying this effort… well, they keep trying, and that’s why they get into debt. But it keeps more of them from getting… well, more of them from trying to get into the higher sector; and those who try often find themselves so burdened by debt that they can’t get there at all.

GREGORY WILPERT: Right. Well, unfortunately we’ve run out of time. But thanks so much, Professor Temin, for having joined us today to talk about your book, The Vanishing Middle Class.

PETER TEMIN: Okay. Thank you very much for having me.

GREGORY WILPERT: And thank you for watching The Real News Network.

America’s Painful Self-delusion

Posted on January 19, 2018 by Reid Mukai

By Allen Marshall

Source: Information Clearing House

America is the only nation brought forth by a set of beliefs, and those beliefs, captured so eloquently in our founding documents, are some of the most powerful and inspiring ever conceived. We consider this to be the land of the free, where the individual is supreme and nothing prevents us from going as far as our talents can take us. That image of America – that “brand” – is incredibly strong.

However, there’s a very large gap between that long-held image and the reality of America today. What was once a government built for the people is now a government run for the rich and powerful, one that throws the people under the bus whenever their interests differ from those of the corporate and political leaders who run the show.

And living in one world (the corrupt) while stubbornly believing you live in another (the ideal), despite mounds of evidence, causes a distinct kind of stress, often called cognitive dissonance.

Psychologists suggest that when people are in a state of cognitive dissonance, they’ll search for a way to resolve it, either by rejecting one view or the other as either wrong or unimportant. If you’re a smoker looking at the link between smoking and cancer, for example, you’ll either quit smoking or decide that the research is biased, wrong, or doesn’t apply (in other words, that you’re smart enough to quit before the long-term damage is done).

But what happens if you can’t resolve the two?

For most of us Americans, resolving our cognitive dissonance would mean either accepting that we’re impotent and living futile (and feudal) lives, or rejecting our lifestyles and actively fighting the rot in the system. If we’re not willing to do either of those, the dissonance stays – and eats at us.

People carrying this kind of ongoing, underlying stress find ways of coping with it; in America we’re doing it with self-medication, compulsive behaviors and distractions. Consider the following examples of the way we cope with the ever-present stress in our lives:

Drugs – Our country is awash in drugs, both legal and illegal, that keep us numb. In 2014, there were 245 million prescriptions filled for opioid pain relievers. The number of deaths from drug overdoses has risen from around 30,000 in 2005 to 64,000 in 2016. And communities across the country are being devastated by the opioid epidemic, as explained in this in-depth reporting by Cincinnati.com.
Drinking – People don’t only use drugs to self-medicate; drinking does the trick as well, and we’re doing a lot more of it than we used to. According to a new study in JAMA Psychiatry, overall drinking in the US increased by 11% between 2002-13, while high-risk and problem drinking rose even higher: high-risk drinking rose by 29.9%, while problem drinking rose by 50%.
Mental Illness – In 2015, 17.9% of adults held a diagnosis for a mental disorder, while a 2010 study found that 46.3% of children ages 13-18 had a mental disorder at some point in their young lives, and the majority of those adults and children are given prescriptions. This includes a dramatic increase in ADHD diagnoses for children: According to SharpBrains, “Among children aged 5 to 18, between 1991-92 and 2008-09, rates of ADHD diagnosis increased nearly 4-fold among boys – from 39.5 to 144.6 per 1000 – and nearly 6-fold for girls – from 12.3 and 68.5 per 1000 visits.”
Obesity – If drinking and drugs aren’t your thing – or even if they are – more of us are coping with stress by overeating, and it’s showing up on our waistlines. From 1990 to 2016, the average percentage of obese adults increased from 11.1% to 29.8%; when you add in the number of people who are overweight but not obese, it rises to more than two in three adults.
Sleeping problems – Sleep has a significant impact on our physical and mental health, and in America we’re not getting enough of it: The CDC states that 50-70 million American adults have a sleep or wakefulness disorder.
Media Usage – Is there any better distraction from life’s problems than media? We certainly spend a lot of our time being passively entertained: In 2016, Americans consumed an average of 10 hours of media per day, compared with 7.5 hours per day globally. Nielson reports that lower income adults spend much more time with media than do affluent adults, with adults in households with include under $25,000 watching 211 hours/month of television, versus 113 hours/month for adults in households earning $75,000 or more. (The trend is similar across other media as well.)
The Disease of Debt – According to the New York Fed, household debt reached a new peak in the third quarter of 2017, at $12.8 trillion. Part of our debt problem comes from the compulsive shopping we do as a distraction; the other results from denying the reality that our wages aren’t keeping up with the increase in the cost of living, meaning that we use debt to plug the gap rather than reducing our living standards to align with our reality.

We’re collectively doing so much damage to ourselves, solely to protect our psyches from the reality that the America that used to be is no longer the America we have. And who does that help? As you can see from the points above, it doesn’t help us: Instead, it helps the rich and powerful who are subverting the system. They’re corrupting everything this country once was, and by willfully refusing to acknowledge that reality, we’re inadvertently helping them to do it.

The best thing we can do – for our mental and physical health, as well as for our country – is to open our eyes to what America has become, not what we wish it still was. It’s time to face reality and take action.

Putting an End to the Rent Economy

Posted on January 16, 2018 by Reid Mukai

By Michael Hudson and Vlado Plaga

Source: Unz Review

Interview with Vlado Plaga in the German magazine FAIRCONOMY, September 2017.

Originally, you didn’t want to become an economist. How did it come that you changed your plans and digged so deep into economics?

I found economics aesthetic, as beautiful as astronomy. I came to New York expecting to become an orchestra conductor, but I met one of the leading Wall Street economists, who convinced me that economics and finance was beautiful.

I was intrigued by the concept of compound interest and by the autumnal drain of money from the banking system to move the crops at harvest time. That is when most crashes occurred. The flow of funds was the key.

I saw that these economic cycles were mainly financial: the build-up of debt and its cancellation or wipe-out and bankruptcy occurring again and again throughout history. I wanted to study the rise and fall of financial economies.

But when you studied at the New York University you were not taught the things that really interested you, were you?

I got a PhD as a union card. In order to work on Wall Street, I needed a PhD. But what I found in the textbooks was the opposite of everything that I experienced on Wall Street in the real world. Academic textbooks describe a parallel universe. When I tried to be helpful and pointed out to my professors that the textbooks had little to do with how the economy and Wall Street actually work, that did not help me get good grades. I think I got a C+ in money and banking.

So I scraped by, got a PhD and lived happily ever after in the real world.

So you had to find out on your own… Your first job was at the Savings Banks Trust Company, a trust established by the 127 savings banks that still existed in New York in the 1960s. And you somehow hit the bull’s eye and were set on the right track, right from the start: you’ve been exploring the relationship between money and land. You had an interesting job there. What was it?

Savings banks were much like Germany’s Landesbanks. They take local deposits and lend them out to home buyers. Savings and Loan Associations (S&Ls) did the same thing. They were restricted to lending to real estate, not personal loans or for corporate business loans. (Today, they have all been turned into commercial banks.)

I noticed two dynamics. One is that savings grew exponentially, almost entirely by depositors getting dividends every 3 months. So every three months I found a sudden jump in savings. This savings growth consisted mainly of the interest that accrued. So there was an exponential growth of savings simply by inertia.

The second dynamic was that all this exponential growth in savings was recycled into the real estate market. What has pushed up housing prices in the US is the availability of mortgage credit. In charting the growth of mortgage lending and savings in New York State, I found a recycling of savings into mortgages. That meant an exponential growth in savings to lend to buyers of real estate. So the cause of rising real estate prices wasn’t population or infrastructure. It was simply that properties are worth whatever banks are able and willing to lend against them.

As the banks have more and more money, they have lowered their lending standards.

It’s kind of automatic, it’s just a mathematical law…

Yes, a mathematical law that is independent of the economy. In other words, savings grow whether or not the economy is growing. The interest paid to bondholders, savers and other creditors continues to accrue. That turns out to be the key to understanding why today’s economy is polarizing between creditors and debtors.

You wrote in “Killing the Host” that your graphs looked like Hokusai’s “Great Wave off Konagawa” or even more like a cardiogram. Why?

Any rate of interest has a doubling time. One way or another any interest-bearing debt grows and grows. It usually grows whenever interest is paid. That’s why it looks like a cardiogram: Every three months there’s a jump. So it’s like the Hokusai wave with a zigzag to reflect the timing of interest payments every three months.

The exponential growth of finance capital and interest-bearing debt grows much faster then the rest oft he economy, which tends to taper off in an S-curve. That’s what causes the business cycle to turn down. It’s not really a cycle, it’s more like a slow buildup like a wave and then a sudden vertical crash downward.

This has been going on for a century. Repeated financial waves build up until the economy becomes so top-heavy with debt that it crashes. A crash used to occur every 11 years in the 19th century. But in the United States from 1945 to 2008, the exponential upswing was kept artificially long by creating more and more debt financing. So the crash was postponed until 2008.

Most crashes since the 19th century had a silver lining: They wiped out the bad debts. But this time the debts were left in place, leading to a massive wave of foreclosures. We are now suffering from debt deflation. Instead of a recovery, there’s just a flat line for 99% of the economy.

The only layer of the economy that is growing is the wealthiest 5% layer – mainly the Finance, Insurance and Real Estate (FIRE) sector. That is, creditors living of interest and economic rent: monopoly rent, land rent and financial interest. The rest of the economy is slowly but steadily shrinking.

And the compound interest that was accumulated was issued by the banks as new mortgages. Isn’t this only logical for the banks to do?

Savings banks and S&Ls were only allowed to lend for mortgages. Commercial banks now look for the largest parts of the economy as their customers. Despite the fact that most economic textbooks describe industry and manufacturing as being the main part of economy, real estate actually is the largest sector. So most bank lending is against real estate and, after that, oil, gas and mining.

That explains why the banking and financial interests have become the main lobbyists urging that real estate, mining and oil and gas be untaxed – so that there’ll be more economic rent left to pay the banks. Most land rent and natural resource rent is paid out as interest to the banks instead of as taxes to the government.

So instead of housing becoming cheaper and cheaper it turns out to be much less affordable in our days than in the 1960s?

Credit creation has inflated asset prices. The resulting asset-price inflation is the distinguishing financial feature of our time. In a race tot he bottom, banks have steadily lowered the terms on which they make loans. This has made the economy more risky.

In the 1960s, banks required a 25-30% down payment by the buyer, and limited the burden of mortgage debt service to only 25% of the borrower’s income. But interest is now federally guaranteed up to 43% of the home buyer’s income. And by 2008, banks were making loans no down payment at all. Finally, loans in the 1960s were self-amortizing over 30 years. Today we have interest-only loans that are never paid off.

So banks loan much more of the property’s market price. That is why most of the rental value of land isn’t paid to the homeowner or commercial landlord any more. It’s paid to the banks as interest.

Was this the reason for the savings and loan crisis that hit the US in 1986 and that was responsible for the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995?

The problem with the savings and loan crisis was mainly fraud! The large California S&L’s were run by crooks, topped by Charles Keating. Many were prosecuted for fraud and sent to jail. By the 1980s the financial sector as a whole had become basically a criminalized sector. My colleague Bill Black has documented most of that. He was a prosecutor of the S&L frauds in the 1980s, and wrote a book “The best way to rob a bank is to own one”.

That’s a famous quotation, I also heard that.

Fraud was the main financial problem, and remains so.

Since 2007 Americans were strangled by their mortgages in the sub-prime crisis…

These were essentially junk mortgages, and once again it was fraud. Already in 2004 the FBI said that the American economy was suffering the worst wave of bank fraud in history. Yet there was no prosecution. Essentially in the United States today, financial fraud is de-criminalized. No banker has been sent to jail, despite banks paying hundreds of billions of dollars of fines for financial fraud. These fines are a small portion of what they took illegally. Such payments are merely a cost of doing business. The English language was expanded to recognize junk loans. Before the financial crash the popular press was using the word “junk mortgages” and “Ninjas”: “No Income, No Jobs, no Assets”. So everybody knew that there was fraud, and the bankers knew they would not go to jail, because Wall Street had become the main campaign contributor to the leading politicians, especially in the Democratic party. The Obama Administration came in basically as representatives of the bank fraudsters. And the fraud continues today. The crooks have taken over the banking system. It is hard for Europeans to realize that that this really has happened in America. The banks have turned into gangsters, which is why already in the 1930s President Roosevelt coined the word “banksters”.

I also heard the nice English sayings “Too big to fail” or “Too big to jail”…
But what has become of those 10 million households that ended up losing their homes to foreclosure? How are their economic and living conditions today? What has become of their houses? The economy has recovered…

Most of the houses that were foreclosed on have been bought out by hedge funds for all cash. In the wake of 2008, by 2009 and 2010 hedge funds were saying “If you have $5,000,000 to invest, we’re going to buy these houses that are being sold at distress prices. We’re going to buy foreclosed properties for all cash, because we can make a larger rate of return simply by renting them out.” So there has been a transfer of property from homeowners to the financial sector. The rate of home-ownership in America is dropping.

The economy itself has not recovered. All economic growth since 2008 has accrued only to the top 5% of the economy. 95% of the economy has been shrinking by about 3% per year… and continues to shrink, because the debts were kept in place. President Obama saved the banks and Wall Street instead of saving the economy.

That’s why we live in an “age of deception” as the sub-title of your latest book suggests, I guess?

“People have the idea that when house prices go up, somehow everybody’s getting richer. And it’s true that the entry to the middle class for the last hundred years has been to be able to own your own home…”

What is deceptive is the fact that attention is distracted away from how the real world works, and how unfair it is. Economics textbooks teach that the economy is in equilibrium and is balanced. But every economy in the world is polarizing between creditors and debtors. Wealth is being sucked up to the top of the economic pyramid mainly by bondholders and bankers. The textbooks act as if the economy operates on barter. Nobel prices for Paul Samuelson and his followers treat the economy as what they call the “real economy,” which is a fictitious economy that in theory would work without money or debt. But that isn’t the real economy at all. It is a parallel universe. So the textbooks talk about a parallel universe that might exist logically, but has very little to do with how the real economy works in today’s world.

If you had a picture you’d see me nodding all the time, because that’s what I also found out: if you look at the mathematics, it is polarizing all the time, it is de-stabilizing. Without government interference we’d have crash after crash… It is not under control anymore.

But you also suggest that there’s another factor that makes housing prices go up – and that’s property tax cuts. Why?

“Taxes were shifted off the Donald Trumps of the world and onto homeowners….”

Whatever the tax collector relinquishes leaves more rental income available to be paid to the banks. Commercial real estate investors have a motto: “Rent is for paying interest.” When buyers bid for an office building or a house, the buyer who wins is the one who is able to get the largest bank loan. And that person is the one who pays all the rent to the bank. The reason why commercial investors were willing to do this for so many decades is that they wanted to get the capital gain – which really was the inflation of real estate prices as a result of easier credit. But now that the economy is “loan up,” prospects for further capital gains are gone. So the prices are not rising much anymore. There is no reason to be borrowing. So the system is imploding.

So, how could we change the situation and make land a public utility?

There are two ways to do this. One way is to fully tax the land’s rental value. Public investment in infrastructure – roads, schools, parks, water and sewer systems – make a location more desirable. A subway line, like the Jubilee tube line in London, increases real estate prices all along the line. The resulting rise in rents increases prices for housing. This rental value could be taxed back by the community to pay for this infrastructure. Roads and subways, water and sewer systems could be financed by re-capturing the rental value of the land that this public investment creates. But that is not done. A free lunch is left in private hands.

The alternative is direct public ownership of the land, which would be leased out to whatever is deemed to be most socially desirable, keeping down the rental cost. In New York City, for instance, restaurants and small businesses are being forced out. They’re closing down because of the rising rents. The character of the economy is changing. It is getting rid of the bookstores, restaurants and low-profit enterprises. Either there should be a land tax, or public ownership of the land. Those are the alternatives. If you tax away the land’s rent, it would not be available to be paid to the banks. You could afford to cut taxes on labor. You could cut the income tax, and you could cut taxes on consumption. That would reduce the cost of living.

To me that’s pretty close to the position of Georgists on how to handle land, isn’t it?

I don’t like to mention Henry George, because he didn’t have a theory of land rent or of the role of the financial sector and debt creation. The idea of land tax came originally from the Physiocrats in France, François Quesnay, and then from Adam Smith, John Stuart Mill, and in America from Thorstein Veblen and Simon Patten. All of these economists clarified the analysis of land rent, who ended up with it, and how it should be taxed. In order to have a theory of how much land rent there is to tax, you need a value and price theory. Henry George’s value theory was quite confused. Worst of all, he spent the last two decades of his life fighting against socialists and labor reformers. He was an irascible journalist, not an economist.

The classical economists wrote everything you need to know about land rent and tax policy. That was the emphasis of Adam Smith, John Stuart Mill… all the classical economists. The purpose of their value and price theory was to isolate that part of the economy’s income that was unearned: economic rent, land rent, monopoly rent, and financial interest. I think it is necessary to put the discussion of tax policy and rent policy back in this classical economic context. Henry George was not part of that. He was simply a right-wing journalist whom libertarians use to promote neoliberal Thatcherite deregulation and anti-government ideology. In Germany, his followers were among the first to support the Nazi Party already in the early 1920s, for instance, Adolf Damaschke. Anti-Semitism also marked George’s leading American followers in the 1930s and ‚40s.

So I guess I have to go back a bit further in history, to read the original Physiocrats as well…

John Stuart Mill is good, Simon Patten is good, Thorstein Veblen is wonderful. Veblen was writing about the financialization of real estate in the 1920s in his Absentee Ownership. I recently edited a volume on him: Absentee Ownership and its Discontents (ISLET, Dresden, 2016).

Germany’s land tax reform seems to go in the wrong direction. Germany has to establish new rules for it’s “Grundsteuer” that in fact is a mingled tax on land and the buildings standing on it, based on outdated rateable values of 1964 (in the West) and 1935 (in the East). The current reform proposals of the federal states will maintain this improper mingling and intend a revenue neutral reform of this already very low tax. It brings about 11 billion Euro to the municipal authorities, but this is only 2% of the total German tax revenue, whereas wage tax and sales tax make up for 25% each. We need a complete tax shift, don’t we?

Germany is indeed suffering from rising housing prices. I think there are a number of reasons for this. One is that Germans have not had a real estate bubble like what occurred in the US or England. They did lose money in the stock market, and many decided simply to put their money in their own property. There is also a lot of foreign money coming into Germany to buy property, especially in Berlin.

The only way to keep housing prices down is to tax away the rise in the land value. If this is done, speculators are not going to buy. Only homeowners or commercial users will buy for themselves. You don’t want speculators or bank credit to push up prices. If Germany lets its housing prices rise, it is going to price its labor out of the market. It would lose its competitive advantage, because the largest expense in every wage-earner’s budget is the cost of housing. In Ricardo’s era it was food; today it is housing. So Germany should focus on how to keep its housing prices low.

I’d like to come back to the issue of interest once more. The English title of “Der Sektor” is “Killing the host – How Financial Parasites and Debt Bondage Destroy the Global Economy”. It’s much more coming to the point. It struck me that you mention John Brown. He wrote a book called “Parasitic wealth or Money Reform” in 1898. I came across his book some years ago and thought that he was somehow America’s Helmut Creutz of the 19th century. He was a supporter of Henry George, but in addition John Brown analyzed and criticized the interest money system and its redistribution of wealth. He said that labour is robbed of 33% of its earnings by the parasitic wealth with subtle and insidious methods, so that it’s not even suspected. Why does almost nobody know this John Brown?

John Brown’s book is interesting. It is somewhat like that of his contemporary Michael Flürscheim. Brown’s book was published by Charles Kerr, a Chicago cooperative that also published Marx’s Capital. So Brown was a part of the group of American reformers who became increasingly became Marxist in the 19^th and early 20^thcentury. Most of the books published by Kerr discussed finance and the exponential growth of debt.

The economist who wrote most clearly about how debt grew by its own mathematics was Marx in Vol. III of Capital and his Theories of Surplus Value . Most of these monetary writers were associated with Marxists and focused on the tendency of debt and finance to grow exponentially by purely mathematical laws, independently of the economy, not simply as a by-product of the economy as mainstream economics pretends.

So you recommend reading his book?

Sure, it is a good book, although only on one topic. Also good is Michael Flürscheim’s Clue to the Economic Labyrinth (1902). So is Vol. III of Capital.

Brown’s plan of reforms included the nationalization of banks and the establishment of a bank service charge in lieu of interest. The latter sounds remarkably up-to-date. In Germany the banks are raising charges because of the decrease in their interest margins. How is your view on the matter of declining interest rates?

Well, today declining interest rates are the aim of central bank Quantitative Easing. It hasn’t helped. The most important question to ask is: what are you going to make your loans for? Most lending at these declining interest rates has been parasitic and predatory. There’s a lot of corporate take-over lending to companies that borrow to buy other companies. There is an enormous amount of stock market credit that has helped bid up stock prices with low-interest credit and arbitrage. This has inflated asset prices for stocks, bonds and real estate. If the result of low interest rates is simply to inflate asset prices, the only way this can work is to have a heavy tax on capital gains, that is asset price gains. But in the US, England, and other countries there are very low taxes on capital gains, and so low interest rates simply make housing more expensive, and make stocks and buying a flow retirement income (in the form of stocks or bonds that yield dividends and interest) much more expensive.

I guess Brown is getting to the positive aspects of low interest also.

What Brown was talking about were the problems of finance. In the final analysis there is only one ultimate solution: to write down the debts. Nobody really wants to talk about debt cancellation, because they try to find a way to save the system. But it can’t be fixed so that debts can keep growing at compound rates ad infinitum. Any financial system tends to end in a crash. So the key question is how a society is NOT going not to pay debts that go bad. Will it let creditors foreclose, as has occurred in the US? Or are you going to write down the debts and wipe out this overgrowth of creditor claims? That’s the ultimate policy that every society has to face.

Very topical, the German Bundesbank sees the combination of low interest rates and a booming housing market as a dangerous cocktail for the banking sector. “The traffic lights have jumped to yellow or even to dark yellow”, Andreas Dombret said, after the Bundesbank had denied the problem in the last years by dismissing it as Germany’s legitimate catch-up effects. The residential property prices have gone up by 30% since 2010, in the major cities even by more than 60%. The share of real estate loans in the total credit portfolio is significantly rising. The mortgage loans of the households have increased in absolute terms as well as relative to their income. It’s only due to the low interest rates that the debt service has not increased yet. But the banks and savings companies are taking on the risk: the mortgages with terms of more than ten years have risen to more than 40% of the residential real estate loans. The interest-change risks lie with the banks. Don’t we have to face up to the truth that interest rates shouldn’t go up again?

What should be raised are taxes on the land, natural resource rent and monopoly rent. The aim should be to keep housing prices low instead of speculation. Land rent should serve as the tax base, as the classical economists said it should. Adam Smith, John Stuart Mill… all urged that the basis of the tax system should be real-estate and natural resource rent, not income taxes (which add to the cost of labor), the cost of labor and not value-added taxes (which increase consumer prices). So tax policy and debt write-downs today are basically the key to economic survival.

Banking should be a public utility. If you leave banking in the present hands, you’re leaving it in the hands of the kind of crooks that brought about the financial crisis of 2008.

Couldn’t the subprime-crisis have been prevented if the Fed had introduced negative interest rates in the 1990s?

No. The reason there was the crash was fraud and speculation. It was junk mortgages and the financialization of the economy. Pension funds and people’s savings were turned over to the financial sector, whose policy is short-term. It seeks gains mainly by speculation and asset price inflation. So the problem is the financial system. I think the Boeckler foundation has annual meetings in Berlin that focus on financialization and explain what the problem is.

Yes, that’s a big topic. The financial sector is interested, as you said, in short-term gains, but people who want to save for their retirement are interested in long-term stability – that is contradictory. Do you know the “Natural Economic Order by Free Land and Free Money” by Silvio Gesell?

It is not practical for today’s world, it is very abstract. The solution to the financial problem really has to be ultimately a debt write-down, and a shift to the tax system, as the classical economists talked about.

Gesell was also advocating the taxing of land. I think he had something in mind with bidding for the land, letting the market fix the prices.

He did not go beneath the surface to ask what kind of market do you want. Today, the market for real estate is a financialized market. As I said, the basic principle is that most rent is paid out as interest. The value of real estate is whatever a bank will lend against it. Unless you have a theory of finance and the overall economy, you really don’t have a theory of the market.

You are advocating a revival of classical economics. What did the classical economists understand by a free economy?

They all defined a free economy as one that is free from land rent, free from unearned income. Many also said that a free economy had to be free from private banking. They advocated full taxation of economic rent. Today’s idea of free market economics is the diametric opposite. In an Orwellian doublethink language, a free market now means an economy free for rent extractors, free for predators to make money, and essentially free for financial and corporate crime. The Obama Administration de-criminalized fraud. This has attracted the biggest criminals – and the wealthiest families – to the banking sector, because that’s where the money is. Crooks want to rob banks, and the best way to rob a bank is to own one. So criminals become bankers. You can look at Iceland, at HSBC, or at Citibank and Wells-Fargo in the news today. Their repeated lawbreaking and criminal activities have been shown to be endemic in the US. But nobody goes to jail. You can steal as much money as you want, and you’ll never go to jail if you’re a banker and pay off the political parties with campaign contribution. It’s much like drug dealers paying off crooked police forces. So crime is pouring into the financial system.

I think this is what’s going to cause a return to classical economics – the realization that you need government banks. Of course, government banks also can be corrupted, so you need some kind of checks and balances. What you need is an honest legal system. If you don’t have a legal system that throws crooks in jail, your economy is going to be transformed into something unpleasant. That’s what is happening today. I think that most Europeans don’t want to acknowledge that that’s what happened in America (USA). There is such an admiration of America that there is a hesitancy to see that it has been taken over by financial predators (a.k.a. “the market”).

We always hear that oligarchies are in the east, in Russia, but hardly anyone is calling America an oligarchy… although alternative media says that it’s just a few families that rule the country.

Yes.

Michael Hudson is the author of Killing the Host (published in e-format by CounterPunch Books and in print by Islet). His new book is J is For Junk Economics. He can be reached at mh@michael-hudson.com

Boobs on Credit

Posted on January 3, 2018 by Reid Mukai

From BreastImplantFailure.net

By Jim Quinn

Source: The Burning Platform

Do you ever hear something so startlingly mind numbingly ridiculous you realize it must be a sign things have gotten so fucked up something has got to give? As I was driving to work yesterday morning on the Schuylkill Expressway a commercial comes on the radio from a plastic surgeon advertising for anyone looking for a better set of boobs. I had never heard a plastic surgeon commercial before, so I thought that was unusual. But, that wasn’t the best part. This plastic surgeon was offering no money down 18 month interest free financing on your new boobs.

I wonder if they are moving boobs with subprime debt the same way the auto companies have used subprime debt to move cars. Of course, when a deadbeat defaults on an auto loan the car is easily repossessed. What happens when a bimbo defaults on her boob loan? How narrow minded of me. What happens when some dude who wants to be a bimbo defaults on his/her loan? I guess it was just a matter of time before breast enhancement met debt enhancement in this warped world of materialism, narcissism, financialization, and delusions.

Now that revolving credit has reached a new all-time high of $1 trillion and total consumer debt outstanding has exceeded it’s 2008 peak at $12.8 trillion, the Fed has completed its job of helping the average American again in-debt themselves up to their eyeballs. This is considered a success story in this twisted, perverted, bizarro world we call America today. The solution to an epic debt induced global financial catastrophe caused by Federal Reserve easy money, Wall Street fraud, and Washington DC corruption has been to increase global debt by 50% since 2007, with virtually all of it created by central bankers and the governments they control.

In what demented Ivy League educated academic mind would piling $68 trillion more debt on the backs of taxpayers as a cure for a disease caused by the initial $149 trillion of debt be considered rational and sustainable? It’s like having pancreatic cancer and trying to cure it with a self inflicted gunshot. And no one seems to care about or even notice the coming reset when this mass debt induced hysteria of delusion turns into the biggest financial collapse in the history of mankind.

This entire ponzi scheme edifice of debt is nothing but a confidence game. When people begin to realize they can’t repay their own debts, start to understand their governments will never honor their debt based promises, and realize central bankers are nothing more than pretend wizards behind a curtain, the confidence will evaporate in an instant and a collapse which will make 2008/2009 look like a walk in the park will ensue. That’s when civil and global war will engulf the world and teach people real lessons about the real world.

The boobs on credit commercial I heard this week is just another example of Wall Street and their Deep State crony co-conspirators completing their scheme to financialize every aspect of our lives and entrap us in chains of debt, beholden to these modern day Wall Street slave owners. When you see the record number of retail bankruptcies and store closings happening when GDP is supposedly rising by 3% and witness with your own two eyes the number of vacant storefronts and restaurants across our great land of materialism, you might wonder why revolving credit card debt is at a new all-time high.

The answer is Wall Street has successfully financialized virtually every aspect of our day to day lives. Consumer and taxpayer transactions which required cash or check ten years ago can now be paid with a credit card. You can pay your IRS bill with a credit card. You can pay your real estate taxes with a credit card. You can pay your utilities with a credit card. You can pay your school tuition with a credit card. You can pay your rent with a credit card. You can “buy” furniture and appliances without paying for seven years. And guess what? That’s what millions of average Americans are doing. In addition, they are driving “rented” $35,000 automobiles on seven year nothing down payment plans.

This massive debt induced fraud of a recovery gives the appearance of normalcy and stability. The stock market is at all-time highs is used as the narrative of central banker success. We’ve experienced extremely low volatility as the central bankers around the world have coordinated their money printing/debt creating schemes to purposely elevate financial markets to give the masses confidence that all is well. Anyone with critical thinking skills knows all is not well. The longer this fake stability is maintained the greater the collapse. Success breeds disregard for the possibility of catastrophe.

So you can call me the boy who cried wolf, but our Minsky Moment is approaching. Sometimes they do ring a bell at the top. In this case they are shaking fake boobs at the top.

“Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.” – Hyman Minsky

Why We’re Doomed: Our Economy’s Toxic Inequality

Posted on December 5, 2017 by Reid Mukai

By Charles Hugh Smith

Source: Of Two Minds

Anyone who thinks our toxic financial system is stable is delusional.

Why are we doomed? Those consuming over-amped “news” feeds may be tempted to answer the culture wars, nuclear war with North Korea or the Trump Presidency.

The one guaranteed source of doom is our broken financial system, which is visible in this chart of income inequality from the New York Times: Our Broken Economy, in One Simple Chart.

While the essay’s title is our broken economy, the source of this toxic concentration of income, wealth and power in the top 1/10th of 1% is more specifically our broken financial system.

What few observers understand is rapidly accelerating inequality is the only possible output of a fully financialized economy. Various do-gooders on the left and right propose schemes to cap this extraordinary rise in the concentration of income, wealth and power, for example, increasing taxes on the super-rich and lowering taxes on the working poor and middle class, but these are band-aids applied to a metastasizing tumor: financialization, which commoditizes labor, goods, services and financial instruments and funnels the income and wealth to the very apex of the wealth-power pyramid.

Take a moment to ponder what this chart is telling us about our financial system and economy. 35+ years ago, lower income households enjoyed the highest rates of income growth; the higher the income, the lower the rate of income growth.

This trend hasn’t just reversed; virtually all the income gains are now concentrated in the top 1/100th of 1%, which has pulled away from the top 1%, the top 5% and the top 10%, as well as from the bottom 90%.

The fundamental driver of this profoundly destabilizing dynamic is the disconnect of finance from the real-world economy.

The roots of this disconnect are debt: when we borrow from future earnings and energy production to fund consumption today, we are using finance to ramp up our consumption of real-world goods and services.

In small doses, this use of finance to increase consumption of real-world goods and services is beneficial: economies with access to credit can rapidly boost expansion in ways that economies with little credit cannot.

But the process of financialization is not benign. Financialization turns everything into a commodity that can be traded and leveraged as a financial entity that is no longer firmly connected to the real world.

The process of financialization requires expertise in the financial game, and it places a premium on immense flows of capital and opaque processes: for example, the bundling of debt such as mortgages or student loans into instruments that can be sold and traded.

These instruments can then become the foundation of an entirely new layer of instruments that can be sold and traded. This pyramiding of debt-based “assets” spreads risk throughout the economy while aggregating the gains into the hands of the very few with access to the capital and expertise needed to pass the risk and assets off onto others while keeping the gains.

Profit flows to what’s scarce, and in a financialized economy, goods and services have become commodities, i.e. they are rarely scarce, because somewhere in the global economy new supplies can be brought online.

What’s scarce in a financialized economy is specialized knowledge of financial games such as tax avoidance, arbitrage, packaging collateralized debt obligations and so on.

Though the billionaires who have actually launched real-world businesses get the media attention–Bill Gates, Jeff Bezos, Steve Jobs, et al.–relatively few of the top 1/10th of 1% actually created a real-world business; most are owners of capital with annual incomes of $10 million to $100 million that are finance-generated.

This is only possible in a financialized economy in which finance has become increasingly detached from the real-world economy.

Those with the capital and skills to reap billions in profits from servicing and packaging student loan debt have no interest in whether the education being purchased with the loans has any utility to the indebted students, as their profits flow not from the real world but from the debt itself.

This is how we’ve ended up with an economy characterized by profound dysfunction in the real world of higher education, healthcare, etc., and immense fortunes being earned by a few at the top of the pyramid from the financialized games that have little to no connection to the real-world economy.

Anyone who thinks our toxic financial system is stable is delusional. If history is any guide (and recall that Human Nature hasn’t changed in the 5,000 uears of recorded history), this sort of accelerating income/wealth/ power inequality is profoundly destabilizing–economically, politically and socially.

All the domestic headline crises–culture wars, opioid epidemic, etc.–are not causes of discord: they are symptoms of the inevitable consequences of a toxic financial system that has broken our economy, our system of governance and our society.

The New Economy: Unemployment and the Return of the American Hobo

Posted on November 29, 2017 by Reid Mukai

By Sheldon Greaves

Source: Cogito!

A few years ago I read somewhere about a trend in the “gig economy” in which people who had been reduced to living in their cars or RVs roamed the country by the thousands; homeless, nomadic workers driving from one temporary job to another. It painted a tragic picture; underpaid, overworked, often lacking health insurance, men and women, many of whom ought to be enjoying retirement but were working in warehouses filling orders for Amazon (“Camperforce”) or stocking shelves in a big-box store.

It sharply reminded me of the Great Depression, another time when mobile workers moved from place to place across the country in search of work. Thinking about this I realized that what we were seeing was the return of the migrant worker apart from the seasonal farm worker, i.e., the Hobo. Also called Tramps, Bums and other less charitable names, these men were the displaced detritus of the Great Depression who wandered the country looking for any jobs that would help them survive and, if there was any left over, to send home to their families. It was a dangerous life; travelling by hopping freight trains or hitchhiking on the highways wasn’t the safest way to get around. Many hobos were maimed or killed in accidents travelling this way, or were victims of violence. Loren Eisley’s wonderful memoir All the Strange Hours recalls his days as a young hobo with all of the dangers and troubles that went with being a hobo. They also faced hostility from towns naturally suspicious of outsiders, especially if there wasn’t any work even for the locals.

But the hobos also became a part of American folklore. The music of Woody Guthrie, who spent quite a bit of time on freight trains himself, helped to make the plight of these unemployed workers known to the rest of the country. Government programs found ways to harness this pool of labor and skill, pouring it into vast projects, many of which continue to contribute to national economy today.

There was, however, another side to hobo life. It became a sort of counter-culture, a rebellion of sorts against a social order that had unfairly cast aside decent, hard-working people for the sake of profit. Hobo life in some cases became a form of dropout culture, mainly, I suspect, as a way of embracing what apparently could not be avoided. An old professor of mine, who spent some of his youth as a tramp, recalled how some of his tramping companions actually knew more about science and literature than his college professors, but preferred tramping as a better way to enjoy God’s creations. Dropouts indeed.

I have been fascinated by American dropout culture as a response to moments when society becomes economically, intellectually, morally, and spiritually intolerable and so, like a few Biblical figures, one leaves, going out of bondage, but into the wilderness for whatever it may bring one. Historically, I’ve noticed that from Roanoke to the 1960’s and 70’s, the dropouts generally seemed to have a point, even if it wasn’t clear at the time. Sometimes the dropouts used their unique viewpoint to inform changes for the better, or became part of grander projects as happened with the government work projects of the New Deal.

So it is with some bemusement that I have noticed an interesting trend when it comes to the mobile temp workers, hobos with RVs or living out of their cars. Over the last seven or so years a small body of literature has emerged celebrating the homeless, wandering worker. Getting out of debt is a common reason for ditching less settled living, and as a rejection of consumerism (Ironic, given how many of these mobile temp jobs are serving precisely that consumer economy). The whole thing has a Small is Beautiful/Voluntary Simplicity vibe to it. Three of the six or so book titles of the last few years even reference “living in a van down by the river” in homage to a classic SNL skit.

So which is it? Is the new hobo a national tragedy in slow-motion, or rebellion against consumer culture, a new manifestation of the All-American dropout? I think it’s too early to tell. This may be nothing more or less than trying to make the best of a bad situation. I hope it’s more than that.

Famed American author and philosopher Eric Hoffer, himself a long-time migrant worker, had some remarkable insights into the responsibility of a nation to do right by such men and women. In his essay, “The Role of the Undesirables”, based on his own experience in government work camps in the early 1930’s. He draws some interesting and telling comparisons between the “human junk pile” that made up the bulk of his fellow workers and the early American pioneers–themselves undesirables from Europe–who built the nation. He points out that these pioneers craved change, much like the RV hobos of today. Hoffer writes: “…the quality and destiny of a nation are determined to a considerable extent by the nature and potentialities of its inferior elements.” He further argues that the quality of a nation is likewise manifest by how those at the bottom rise to the top. And that, I submit, is the problem. Is there an endgame to the RV hobo life that involves a chance to settle back down, to enjoy some of the fruits of one’s labor in security and dignity? Certainly a life on the road can be exciting. I find the idea compelling myself. But the other kind of mobility–upward mobility–has all but ceased to exist in this country. I cannot yet say whether these economic rebels of the road are truly making a new way of living, or accepting the unacceptable.

Financialization, precarity and reactionary authoritarianism

Posted on October 25, 2017 by Reid Mukai

By increasing global competition, the precariousness wrought by financialization has laid the foundations for reactionary authoritarianism around the world.

By Max Haiven

Source: ROAR

Financialization: Fictitious Capital in Popular Culture and Everyday Life, released last month in paperback from Palgrave Macmillan. The book argues that financialization is not just the increasing power and authority of speculative capital over the global economy, but also the way the it seems into and is reflected in politics, social institutions and the realm of cultural meaning.

This section comes at the end of a chapter on the ways financialization both drives onward and depends on the increasing precariousness of workers, putting us into global competition with one another and also infecting our sense of value and success. Haiven argues that this situation produces a tendency towards reactionary authoritarianism based on a “forgetting” and a loathing of our shared human condition of precariousness. He concludes by asking us to consider other models for thinking about debt and precarity that stress radical interdependence.

It is followed by a brief authors’ note reflecting on the piece four years since it was first penned in 2013.

Precarious fear and loathing

Today precariousness is the norm, not the exception. Our current precarious moment, one dominated by market and financial forces and manifesting itself as a violent form of hyper-neoliberal austerity (which is producing ever more and deeper economic precariousness), is only one particularly pernicious manifestation of an underlying ontological condition. It is worse than many such manifestations precisely because it is so successful in privatizing precariousness through the logic of individualism and competition.

We come to blame ourselves, rather than the system, for our precariousness, in part because, unlike some rigid caste-based system or a slave society, we are (most of us) legally and technically free to escape precariousness (though, ironically, to escape by embracing precarity, by using every skill, talent and asset we might possess to leverage ourselves into fabled prosperity). It is a system that works by promising that we can, each of us, alone, escape our existential condition of precariousness by getting rich, by obeying the system’s axiomatic dictates and playing our role.

The constant barrage of images and tales of the lifestyles of the rich and famous, of celebrities and of others who have “made it” do not exist (as they did in a previous era) to show us the right social order and the natural superiority of certain sorts of people. Rather, these ubiquitous dream-images promise each of us a life without precariousness or, more accurately (if we think about the cinematic depictions of the Wall Street predator) a life where precariousness is mastered and leveraged.

This helps explain the virulent disdain that grows and grows towards the poor, the refugee, the (almost always racialized) populations deemed to be “at risk.” To the extent that we succeed in leveraging ourselves out of the total liquidation of our lives by building up a life of financial prosperity and (the illusion of) security, we are compelled to close ourselves off to what Judith Butler, drawing on the work of Emmanuel Levinas, calls the “face” of the other: the empathetic image of existential suffering. In fact, to the extent participation in financialization has come afford us the privilege of forgetting our inherent shared condition of precariousness, we come to loathe the face of precarity, loathe the way it calls us back into a fellow precarious human body.

The colors of risk

As a result, we should not expect that the almost universal adoption of the free market will lead to any sort of peace or cosmopolitanism in the world, as neoliberal thinkers like Fredrich Hayek or Francis Fukayama believed. Nor should we assume that the financialized age of austerity will prompt such a wave of popular discontent that radical social transformation is inevitable. To the extent that we are made more and more precarious, we brew an existential anger, a self-loathing that can easily be displaced onto convenient others.

Ironically, it is not easily displaced onto the architects and beneficiaries of financialized capitalism, but instead gravitates towards the more precarious, the more abject: they who call us back into the shared precarious what Marx called our “species being,” our shared precarious condition as imaginative cooperative animals dependent on one another for joy and survival. While this may or may not manifest itself in the form of new nationalisms, it will manifest itself in the form of hatred towards the homeless, towards refugees, towards welfare recipients and towards others.

It is vital to note that, in North America and Europe, and in different ways elsewhere, this precarious vitriol cannot be separated from the history of race and racism. Older modes of racial enslavement, apartheid and segregation served the same function, similarly allowing those read as “white” to posit a superior form of humanity which both occluded a shared precariousness and elevated the material wealth and security of whites at the expense of immiserated, exploited and impoverished non-whites (in different ways, in different times and places).

Indeed, earlier moments of capitalism explicitly mobilized whiteness and its real and perceived benefits vis-a-vis precariousness to divide workers along color lines, a condition that fed, and was fed by, the existential precariousness of non-whites who, as second-class citizens, slaves, migrant laborers or perpetual “outsiders,” were not afforded the same personal safety or security (neither de jure nor de facto).

The current reigning assumption is that we have entered a “post-racial” moment, that racism is merely a marginal anachronism, and that racialized people face no systemic barriers to achieving a non-precarious life like “everyone else” — in other words, they are as free to enter the market as anyone else, and the market does not “see” race. The opposite is, in fact, the case: racism and racial inequality towards non-white people persist and, in some ways, are even worse thanks to the mechanisms of financialized market which also works to make those inequalities functionally invisible.

Banking on resentment

On another level, we might speculate that precariousness, in both image and concept, is already racialized, that our understandings of what it means to be precarious, and the negative associations with which this term resonates, are already coded as non-white and call up a legacy and a present of racialized images of abjection, destitution, subservience and shiftlessness. Indeed, we might ask to what extent political systems in the West base their legitimacy on the invisiblized darkness of precariousness. The politically expedient citation of the disappearance of “hard-working Americans” and “the middle class” (both of which are imagined as white) into a dark miasma of economic depression is indelibly associated with popular depictions of ghettos and menial racialized workers.

Suffice it for now to say that we can certainly see these trends as played out in largely white backlash movements which have arisen to confront non-white peoples’ or groups’ claims to social and economic justice. From anti-Muslim organizing in Western Europe (framed in terms of defending a white national heritage and white workers), to anti-Black “whitelash” in the United States (from the Detroit Riots to Rodney King to Trevon Martin), to the anti-Indigenous vitriol in my home country of Canada, these seemingly spontaneous “social movements” speak not only to the politics of ignorance and fear, but also to the socio-economic conditions of precariousness, as well as the perceived failure of the state to live up to its promises to prevent precariousness for white people, all coupled with a history that locates precariousness along the axes of race and racialization.

This deeper existential and ontological crisis and anger is joined by another: the crisis of the middle class. Those professional or semi-professional workers who have been taught to expect middle-class incomes and job security are quickly finding themselves disposable in a vast pool of precarious workers, leading highly indebted, precarious lives with little hope for reprieve. In the coming years, increasingly fascistic political powers will gain ground by offering hollow promises to rebuild the middle class and to end precarity, through neocolonial geopolitical adventure or by creating or maintaining localized under-classes of hyper-precarious migrant or abject workers.

The cult of risk management

What would a politics look like that promised not to end but to embrace precariousness, not as an inescapable economic “reality” (which is what our current system of financialized austerity pledges) but as a socio-ontological sine qua non?

The answer is yet to be determined. But, ironically, an answer may be emerging out of the financialized paradigm that has driven precariousness to a new level of universality and acuity. The speculative ethos that animates financialization is one intimately and irreducibly acquainted with the ontological realities of precariousness. “Risk” and “risk management” are, underneath all their trappings of quantitative and scientistic rigour, mythological constructs for engaging with, navigating through and manipulating the cultural fabric of precariousness. Investments are, at a certain abstract level, attempts to leverage precarious life into more advantageous out- comes.

Finance, as a broad sphere of activities, is a mechanism by which individuals and society at-large seek to gain agency over the precariousness and contingency of the future. It is a particularly perverse mechanism, and one whose logic and mechanisms are either occluded from sight, or so complex, rapid or vast to be fully grasped, even by their primary engineers and agents in hedge funds and investment banks. Yet finance reproduces itself by cultivating and mobilizing the energies, creativity and hope of almost everyone in their attempts to thwart or diminish precarity, and aggregates all these individual and institutional actions into a system which, tragically, only drives greater and greater precariousness.

Generative debts?

The silver lining is perhaps this: what financialization reveals is the inherent futurity of precariousness. The word itself derives from the Latin prex or prayer, with strong connotations of begging or soliciting: yearning for future outcomes, throwing oneself on the mercy of fate or divine provenance. What our financialized moment might reveal is that our shared precariousness, which is the condition both of disastrous authoritarianism (including the disorganized and diffuse totalitarianism of finance capital itself) and of solidarity, does not only emerge from our shared material and ontological conditions; it is also a horizon of shared futurity. That is, precariousness carries encrypted within it a shared relationship with the future.

In this sense, nascent anti-debt organizing in the United States and elsewhere bears a great deal of potential. As Richard Dienst, David Graeber and Andrew Ross all affirm, the politics of debt, if they are to be a radical challenge to the financialized empire, cannot simply be a demand for some libertarian fantasy of complete individual freedom. Rather, they must embrace a broader, more capacious concept of the ontological wealth of social bonds that make life possible, that render all of us precariously reliant on one another. In this sense, they, each in their own way, encourage us to envision an expanded notion of (non-monetary) debt beyond as a grounds for crafting and building common futures through the entanglement of our social relationships.

Likewise, Angela Mitropoulos insists on the importance of moving beyond the limited concepts of financial debt and “debt servitude,” which depend upon and exalt the ideal of the individuated (white, masculine) self, the esteemed, contract-making personage at the heart of Western liberal political and economic philosophy and law. She notes that behind today’s politics of debt there reside the unacknowledged debts germane to the worlds of social reproduction and affective labor on which we all rely, which today are increasingly commodified in the so-called service sector. Indeed, the growth of precarious, feminized service-based labor over the past few decades cannot be separated from the rise of debt as a means to discipline workers and extract surplus value. Beyond the hollow promise of an ideal state of freedom from all obligations, radical potentialities might emerge from the affirmation and recognition of shared interdependency, of the shared need for what today is misrecognized as “service.” As she puts it:

The question it seems to me is not whether our debts can be erased, but what the lines of indebtedness are, how debt is defined, whether it takes the form of a financial obligation or some other consideration of relational inter-dependence, of the forms of life that the routine accounting of debts lets flourish or those that it obscures behind propositions of a seemingly more natural order of individuation, dependence, and obligation.

Beyond the colonial bond?

Glen Coulthard articulates a radical Indigenous reenvisioning of obligation that goes well beyond the Western philosophical canon:

Consider the following example from my people, the Dene Nations of what is now the Northwest Territories, Canada. In the Yellowknives Dene (or Weledeh) dialect of Dogrib, land (or dè) is translated in relational terms as that which encompasses not only the land (understood here as material), but also people and ani- mals, rocks and trees, lakes and rivers, and so on. Seen in this light, we are as much a part of the land as any other element. Furthermore, within this system of relations human beings are not the only constituent believed to embody spirit or agency. Ethically, this meant that humans held certain obligations to the land, animals, plants, and lakes in much the same way that we hold obligations to other people. And if these obligations were met, then the land, animals, plants and lakes would reciprocate and meet their obligations to humans, thus ensuring the survival and well-being of all over time.

Coulthard’s articulation of a broader field of grounded land-based obligation, reciprocity and care demonstrates the radical potentialities that might emerge from a reconsideration of the bonds of debt and the conditions of shared precarity, were we open to re-envision their meanings beyond the hollow promises of security proffered by capital and the state.

Since the publication of Cultures of Financialization I have felt unhappily vindicated in my suspicion that financialization would give right to revanchist authoritarianism. But were I to approach the topic of this excerpt again, I would take more care to locate the origins of the loathing of precariousness within the specific histories of anti-Black racism. I would approach this by making more explicit the origins of finance capital in the trans-Atlantic slave trade and slave economies in the Americas. I would follow this tendency through to the present-day ways that anti-Black racism and white-supremacy, as the template and operating condition of all forms of modern racism, is manifested again and again in the machinations of the financial empire, from the continued neocolonial pillage of Africa to the racialized dimension of the sub-prime loan crisis which led to the single largest theft of Black family wealth since Reconstruction.

Were I to approach this topic again I would also stress more centrally the ways in which settler colonialism destroys and denigrates a cooperative relationship with land, most horrifically by seeking the systematic elimination of autonomous Indigenous presence and power on land. I would seek to understand (as I have elsewhere) how settler colonialism has always been a financialized project, and how financialization has, historically and in the present, been enabled by settler colonialism.

I think that only with these in mind can we seek to understand how financialization has given rise not only to new forms of authoritarianism that promise (white people) respite from the precarity financialization has created, but which are fundamentally based on the acceleration and intensification of white supremacy and settler colonialism.

Finally, were I to approach this chapter again I would caution myself against a conclusion that could appear to call for a kind of new universalist embrace of shared precarity. I would have concerned myself with the way such a universalism, while noble in a certain abstract sense, can work to erase precisely the continued centrality of (anti-Black) racism and settler colonialism. Instead, I would have stressed that overcoming financialized precarity and these systems of oppression and exploitation will be based not only on high-minded virtues but meaningful relationships of militant solidarity and the collective invention of new forms of power, new institutions of care and new frames and practices of revolutionary thought and action.

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