Tag Archives: Hyper-financialization

Prepare to Be Bled Dry by a Decade of Stagflation

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By Charles Hugh Smith

Source: Of Two Minds

The Great Moderation of low inflation and soaring assets has ended. Welcome to the death by a thousand cuts of stagflation. It was all so easy in the good old days of the past 25 years: just keep pushing interest rates lower to reduce the cost of borrowing and juice credit expansion ((financialization) and offshore industrial production to low-cost nations with few environmental standards and beggar-thy-neighbor currency policies (globalization).

Both financialization and globalization are deflationary forces, as they reduce costs. They are also deflationary to the wages of bottom 90%, as wages are pushed down by cheap global labor and stripmined by financialization, which channels the vast majority of the economy’s gains into the top tier of the workforce and those who own the assets bubbling up in financialization’s inevitable offspring, credit-asset bubbles.

To keep the party going, central banks and governments pushed both forces into global dominance: hyper-financialization and hyper-globalization. Policy extremes were pushed to new extremes: “temporary” zero-rate interest policy (ZIRP) stretched on for 6 years as every effort was made to lower the cost of credit to bring demand forward and inflate yet another credit-asset bubble, as the “wealth effect” of the top 5% gaining trillions of dollars in unearned wealth as asset bubbles inflated pushed consumption higher.

Corporate profits soared as credit became essentially free and super-abundant and globalization lowered costs and institutionalized planned obsolescence, the engineered replacement of goods and software that forces consumers to replace their broken / outdated products every few years.

Every economic lever was pulled to extend the vast profits generated by hyper-financialization and hyper-globalization. Currencies were manipulated lower to boost exports, cheap credit kept zombie companies alive, bridges to nowhere and millions of empty flats were built to boost jobs and profits, and so on.

At long last, all these gimmicks have reversed or reached marginal returns: they no longer keep inflation suppressed, asset bubbles inflating and profits expanding. The malinvestment of global capital will be revealed and the costs of the policy gimmickry will be paid by years of stagflation: high inflation, low or negative growth and endless debt crises as the reliance on cheap credit to boost profits comes home to roost.

It turns out that the inevitable offspring of hyper-financialization and hyper-globalization are inflation, credit crises and the undermining of national security as the self-serving goal of pushing corporate profits higher via globalization led to fatal dependencies on competing powers for the essentials of modern life.

Correcting these decades-long extremes will take at least a decade as long-suppressed inflation becomes endemic, supply-chain disruptions become the norm and capital has to be invested in long-term national projects such as reshoring and the engineering of a new more efficient energy mix–projects that will only be expenses for many years.

This demand for structural investments with no immediate profit payoff is what drove the stagflation of the 1970s, a factor I explain in The Forgotten History of the 1970s and The 1970s: From Rotting Carcasses Floating in the River to Kayak Races.

The gains will not even be measured by our current outdated economic metrics of GDP and profits. The gains will be in the national security of essential supply chains and production and in the relocalizing of jobs and capital, not corporate profits.

Our reliance on the endless expansion of credit, leverage and credit-asset bubbles will have its own high cost: the collapse not just of the current Everything Bubble but of the engines that inflated one bubble after another.

Central bank and state authorities are thrashing about cluelessly, as all their gimmicks are now problems rather than solutions. The current policy gimmicks laid the foundations for a decade or more of high inflation, low growth and credit crises as the phantom “wealth” of credit-asset bubbles evaporates.

This will drive a reverse Wealth Effect as the top spenders are crushed by the collapse of asset bubbles. Long-term trends in demographics (shrinking workforces and the skyrocketing population of elderly) and depletion of resources will add fuel to the inflationary / low growth / credit crises bonfires.

Gordon Long and I discuss all these mutually reinforcing trends in A Great Stagflation (36 min). This is the culmination of our decade of programs about all the policy gimmicks that were pushed to extremes to maintain the illusion of stability and growth–an illusion that’s evaporating as it makes contact with stagflationary realities.

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.