Tag Archives: Financialization

The U.S. Economy In Two Words: Asymmetric Gains

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By Charles Hugh Smith

Source: Of Two Minds

The Status Quo is in trouble if the bottom 95% wake up to the asymmetric gains that are the only possible output of our hyper-financialized economy.

The core dynamic of the U.S. economy in this era is asymmetric gains: the gains in income, wealth and power are increasingly concentrated in the top slice of the economy and society, while the income, wealth and power of the majority stagnate or decline.

The Status Quo must paper over this widening gulf with threadbare narratives that no longer match reality: for example, we’re an ownership society. We sure are: the vast majority of the nation’s productive assets are owned by the top 5%.

The U.S. economy has changed, but the transformation is largely invisible to the average participant and conventional economist. The previous iteration of the economy expired in the 1970s, an era of stagflation (stagnant growth and rising inflation that eroded the purchasing power of most households), higher energy costs and increasing global competition, an era in which the “external costs” of industrial-scale pollution finally came home to roost and the early stages of digital technologies began impacting human labor.

Stocks and bonds were destroyed in the 1970s. Investing capital in industrial production no longer generated outsized profits.

The 1980s ushered in a New Economy based on financial magic: the outsized profits flowed to those with access to credit and the tools of financialization: buying assets with borrowed money, selling the assets off in the global marketplace and reaping enormous gains by producing no goods or services.

We now inhabit a hyper-financialized economy in which the only way to get ahead is to speculate. For the middle class, this means speculating in housing: if you hit the jackpot and your house soars in value, then leverage this new wealth into the cash needed to buy a second property–or extract the equity to fund a more luxe lifestyle.

Entrepreneurs seek to generate “value” only as a means of cashing out via an initial public offering or selling their company to a global corporation. The “value” sought now is the perception of value–the magic of future promise that boosts valuations into the millions, or better yet, billions.

How many entrepreneurs are looking forward to owning their company ten years hence? Very few, as “the long haul” has no value in a hyper-financialized economy. If you don’t cash out in six months, your Big Idea might be worthless, leapfrogged by some other Big Idea.

In a hyper-financialized economy, hype is the most valuable skill. Those who can raise $100 million in capital for a fancy juicer win, as do those who sell the Big Idea to global corporations desperate not to miss out on the Next Big Thing.

In a hyper-financialized economy, future income is pulled into the present and monetized to benefit the top dogs. We borrow from the future to fund the inefficiencies of today. It’s a great system, and the Status Quo has the answer to everything: the government can never go broke because all it has to do is print more money.

What a swell idea. Isn’t that what Venezuela has done for the past decade? And how did that work for them? If you think that destroying the purchasing power of “money” is a winner, then by all means, go on believing that the government can never go broke because all it has to do is print more money.

Here’s my favorite chart of asymmetric gains. The vast majority of the gains reaped since the 2008-09 Global Financial Meltdown have flowed to the top .1%. This is not a bug, it is a feature of hyper-financialization. Indeed, it is the only possible output of the current system.

Meanwhile, the bottom 95% live in an economy where wages go nowhere and costs are soaring. The financial media cheers when wages (supposedly) rise by 2%, but nobody dares measure the impact of rising costs in services such as healthcare and higher education.

The Status Quo is in trouble if the bottom 95% wake up to the asymmetric gains that are the only possible output of our hyper-financialized economy. Hype and propaganda are the key tools of the present era, as these are required to disconnect perception from reality. How long the disconnect will last is anyone’s guess, but when the two reconnect, all that is solid now will melt into thin air.

 

Putting an End to the Rent Economy

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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 19th and early 20thcentury. 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

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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

 

This Chart Defines the 21st Century Economy

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By Charles Hugh Smith

Source: Of Two Minds

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

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

Notice that the majority of all income growth now accrues to the the very apex of the wealth-power pyramid. This is not mere chance, it is the only possible output of our financial system. This is stunning indictment of our socio-political system, for this sort of fast-increasing concentration of income, wealth and power in the hands of the very few at the top can only occur in a financial-political system which is optimized to concentrate income, wealth and power at the top of the apex.

Well-meaning conventional economists have identified a number of structural causes of rising wealth/income inequality, dynamics that I’ve often discussed here over the past decade:

1. Global wage arbitrage resulting from the commodification of labor, a.k.a. globalization

2. A winner-takes-most power law distribution of the gains reaped from new technologies and markets

3. A widening mismatch between the skills of the workforce and the needs of a rapidly changing economy

4. The concentration of capital gains in assets such as high-end real estate, stocks and bonds that are owned almost exclusively by the top 10% of households

5. The long-term stagnation productivity

6. The secular decline in the percentage of the economy that flows to wages and salaries

While each of these is real, the elephant in the room few are willing to mention much less discuss is financialization, the siphoning off of most of the economy’s gains by those few with the power to borrow and leverage vast sums of capital to buy income streams–a dynamic that greatly enriches the rentier class which has unique access to central bank and private-sector bank credit and leverage.

Apologists seek to explain away this soaring concentration of wealth as the inevitable result of some secular trend that we’re powerless to rein in, as if the process that drives this concentration of wealth and power wasn’t political and financial.

There is nothing inevitable about such vast, fast-rising income-wealth inequality; it is the only possible output of our financial and pay-to-play political system.

Policy tweaks such as tax reform are mere public relations ploys. The cancer eating away at our economy and society arises from the Federal Reserve and the structure of our financial system, and the the degradation of our representative democracy into a pay-to-play auction to the highest bidder.

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

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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.

Financialization, precarity and reactionary authoritarianism

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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.

When the Butterfly Flaps Its Wings

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credit: Twitter/@caroleenarn

By James Howard Kunstler

Source: Kunstler.com

It remains to be seen what the impact will be from Mother Nature putting the nation’s fourth largest city out-of-business. And for how long? It’s possible that Houston will never entirely recover from Hurricane Harvey. The event may exceed the physical damage that Hurricane Katrina did to New Orleans. It may bankrupt large insurance companies and dramatically raise the risk of doing business anywhere along the Gulf and Atlantic coasts of the USA — or at least erase the perceived guarantee that losses are recoverable. It may even turn out to be the black swan that reveals the hyper-fragility of a US-driven financial system.

Houston also happens to be the center of the US oil industry. Offices can be moved elsewhere, of course, but not so easily the nine major oil refineries that sprawl between Buffalo Bayou over to Beaumont, Port Arthur, and then Lake Charles, Louisiana. Harvey is inching back out to the Gulf where it will inhale more energy over the warm ocean waters and then return inland in the direction of those refineries.

The economic damage could be epic. Much of the supply for the Colonial Pipeline system emanates from the region around Houston, running through Atlanta and clear up to Philadelphia and New York. There could be lines at the gas stations along the eastern seaboard in early September.

The event is converging with the US government running out of money this fall without new authority to borrow more by congress voting to raise the US debt ceiling. Perhaps the emergency of Hurricane Harvey and its costly aftermath will bludgeon congress into quickly raising the debt ceiling. If that doesn’t happen, and the debt ceiling is not raised, the federal government might have to pretend that it can pay for emergency assistance to Texas and Louisiana. That pretense can only go so far before government contractors balk and maybe even walk.

Ordinarily, failure to raise the debt ceiling would lead to a government shut-down, including hurricane recovery operations, unless the president invoked some kind of emergency powers. That would be decisive action, but it could also be the beginning of something that looks like a full-out dictatorship. Powers assumed are often not surrendered when the original emergency is over. And what would the president use for money if a substantial enough number of congresspersons and senators are prompted by their distaste for Mr. Trump to drag out the process of financially re-liquefying the government? (And nevermind even passing a budget.)

Meanwhile, two other major sources of aggravation are waiting off-stage: one is North Korea. Why wouldn’t Kim Jong-un use the opportunity of political disarray in the US to create more headaches for a distracted US government? Never let a crisis go to waste. Another potential irritant is the return of students to American college campuses. Imagine how the campus Antifa forces would react to Mr. Trump assuming emergency powers. It’s easy to foresee an acceleration of violence between the extreme Left and the Extreme right during what is shaping up to look like a major crisis in governing. If the campus Left had any tactical brains, they’d stop marching around in black uniforms and instead organize a mass renunciation of college loan debt.

Behind all this political strife will be wobbling financial markets. The message from the debt ceiling stalemate to the bond market would be that the US can no longer be relied on to pay its debts. Interest rates on US Treasury paper would have to go up as the long-lost concept of risk returned to the bond scene. People and institutions will not be induced to hold bonds unless the yield is recalibrated to the actual risk. Of course, in the mysterious world of bonds (i.e. securitized debt), the price of bonds goes down as interest rates rise. Meaning a lot of current holders of bonds would be hammered if they tried to sell. Rates rising would also spell big trouble for corporations and governments who have to make regular interest payments to bond-holders. A rate rise to as little as 3 percent on US Treasury bonds could spin the country into comprehensive bankruptcy.

How might stock markets and currency markets react to the scenario above? To me it would look like a drop of at least 1000 points on the S & P. The US dollar might actually rise initially as a whole lot of debt is renounced — which makes money actually disappear — but then you have the Federal Reserve waiting on another flank to roll out their own emergency response: Quantitative Easing No. 4, flooding the system with new “money” that has all the appearance and none of the mojo of value, tanking the dollar anew. As a wise correspondent of mine wrote a while back: “financialization is nothing more than money with its value removed.” (Graham Reinders.)

A lot can happen when a faraway butterfly flaps its wings and sets a slight current of air in motion.

Either Reverse All the Perverse Incentives or the System Will Implode

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By Charles Hugh Smith

Source: Of Two Minds

Every perverse incentive is the cash cow for a vested interest or cartel.

I hope it’s not a great shock to discover all the incentives in our status quo are perverse: those who rig the financial system while creating zero real value, jobs, goods or services reap all the big profits; those who take near-zero responsibility for their own health are subsidized by those who take responsibility for their own health; those who try to start enterprises and hire workers are saddled with endless regulations, junk fees and taxes while those who game the system to get welfare (household or corporate) skim the cream for doing nothing for their community or for the nation.

Systems in which all the incentives are perverse implode under their own weight. Those who struggle to pay the mounting costs of Imperial Over-Reach, crony-capitalism and all the skimmers and scammers eventually go bankrupt or quit in disgust, while the army of state dependents and cronies explodes higher.

It has taken decades for the incentives to become so perverse, so we no longer notice the perversity or the pathological consequences.

High-frequency traders and financiers with the ready ear of well-paid political lackeys, stooges, toadies and sycophants run never-lose skimming operations and pay lower tax rates than self-employed and small business owners.

Corporations have increased their share prices not by earning more money by producing more goods and services but by borrowing cheap money from the Federal Reserve and buying back outstanding shares.

Corporations pay less tax if they move production overseas and keep their profits in other countries.

If I wreck one vehicle after another due to reckless irresponsibility, what happens to my insurance premiums? They skyrocket, of course, reflecting the higher risks that result from my behavior and poor choices. Nobody thinks safe drivers should subsidize irresponsible drivers.

But if I wreck my health by recklessly pursuing risky behaviors, I pay the same as people who are careful “drivers” of their health. What sort of incentives does this system generate?

If I want to buy an over-priced home, the system is loaded with incentives to encourage that potentially poor financial decision. But if I want to launch a small enterprise, the incentives are all perverse: steep upfront fees, taxes from the first dollar, and in many cases, fees and taxes on revenues, regardless of whether I am making a profit or losing my shirt.

Corporate profits have soared as financialization and rigging the system have paid much higher returns than risking capital in new goods and services.

corp-profits3-16d

The incentives for home ownership have turned the bottom 90% into debt-serfs in servitude to banks while the top 5% own income-producing assets and businesses.

ownership-assets2-16

Larded with the most perverse incentives possible, the U.S. healthcare system in the final stages of maximum costs, just before it implodes:

US-healthcare4

It’s not hard to design positive incentives. For example:

1. Make preventative care essentially free to everyone ($5 co-pay) but weight the risks and costs created by irresponsible behaviors that ruin health. Reward those who take responsibility for their health by reducing the premiums they pay.

2. Tax all profits on securities held less than a day at 95%. Raise corporate taxes generated by financial activities to 50%, and lower the corporate tax rate on profits earned from producing domestic goods and services to zero.

3. Lower the tax for the first $25,000 earned by small enterprises to zero. Limit total government fees to 5% of revenues for all businesses up to $10 million in annual revenues.

4. Phase out the mortgage interest deduction. Limit mortgage interest deductions to the first $100,000 of mortgage debt.

5. Eliminate the personal income tax (and the need to file a return) for every household with income of $100,000 or less.

6. Automatically sunset every government regulation. Make city, county, state and federal governments renew every regulation every few years via a majority vote or it vanishes from the law books.

7. Make every politician wear a NASCAR-style jacket plastered with the names and logos of their corporate, union and financier contributors. The California Initiative to make this a reality is seeking signatures of registered California voters. Since politicians are owned, let’s make the ownership transparent.

8. Treat drug abuse and addiction as medical conditions rather than crimes.

9. Eliminate the Federal Reserve and its free-money for financiers perverse incentives for debt-serfdom and financial plundering.

10. Eliminate all student loans and debts. Make colleges compete for students on a cash-only basis.

As you no doubt noticed, every perverse incentive is the cash cow for a vested interest or cartel. That’s why the perverse incentives will endure until the system implodes under their pathological weight.