Monday, June 26, 2017

If We Don't Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.
Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks' monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.
History informs us that rising wealth and income inequality generate social disorder.
Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.
Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.
Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.
There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.
The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.
This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.
This is a simplified version of how money is created and issued, but it helps us understand why centrally issued and distributed money concentrates wealth in the hands of those with access to the centrally issued credit and those who have the privilege of leveraging every $1 of cash into $19 newly created dollars that earn interest.
Imagine if we each had a relatively modest $1 million line of credit at 0.25% interest from a central bank that we could use to issue loans of $19 million. Let’s say we issued $19 million in home loans at an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million would be $760,000 annually --let’s assume we net $600,000 per year after annual expenses of $160,000. (Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually).
Median income for workers in the U.S. is around $30,000 annually. Thus a modest $1 million line of credit at 0.25% interest from the central bank would enable us to net 20 years of a typical worker’s earnings every single year. This is just a modest example of pyramiding wealth.
Next let’s say we each get a $1 billion line of credit which we leverage into $19 billion in loans earning 4%. Now our net annual income is $600 million, the equivalent income of 20,000 workers. We did nothing to improve productivity, nor did we produce any goods or services. We simply used the power of central banking and fractional reserve lending to skim $600 million in financial rents from those actually producing goods and services.
Note that we are not uniquely evil or avaricious in maximizing our private gain from the central bank system; we're simply responding rationally to the system’s incentives.
The system concentrates wealth and subverts democracy not because participants are different from the rest of us but because they are acting rationally within a perverse, exploitive system. Would you turn down $600,000 a year? How about $600 million a year?
It makes no sense for banks and financiers not to maximize their gains in this system. Those who fail to maximize their gains will be fired.
I hope you understand by now that the current system of issuing money and credit benefits the few at the expense of the many. The vast privilege and the equally vast inequality it generates is the only possible output of the system.
This inequality cannot be reformed away; it is intrinsic to centrally issued money and private banking with access to central bank credit.
The problem isn’t fiat money; it’s centrally issued money/credit that is distributed to the few at the expense of the many. If we want to limit the subversion of democracy and reduce wealth inequality, we must decentralize and democratize the issuance and distribution of money.
In the current system, money isn’t created to reward increasing productivity. It is created to increase the wealth and power of the privileged.
If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.
By concentrating wealth and power, centrally issued and distributed money doesn’t just subvert democracy. It also optimizes inequality, monopoly, cronyism, stagnation, social immobility and systemic instability.
The status quo "solution" is Universal Basic Income (UBI), a form of subsistence designed to quell the righteous urge to throw off the monetary yoke of the privileged financial Elites. If scraping by as a debt-serf on UBI is the New American Dream, we need a new economic/social system.


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Sunday, June 25, 2017

A Stock Market Crash Scenario

The one thing we can know with certainty is it won't be easy to profit from the crash.
After 8+ years of phenomenal gains, it's pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry's slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely.
Few have taken the risk of projecting a date for the crash, this gent being a gutsy outlier: Hedge Fund CIO Sets The Day When The Next Crash Begins.
Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months.
My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:
When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down.
Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance.
As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat).
As bearish short interest and bets on higher volatility fade, insiders go short.
A sudden air pocket takes the market down, triggered by some bit of "news." (Nothing like a well-engineered bout of panic selling to set up a profitable Buy the Dip opportunity.)
And since traders have been well-trained to Buy the Dips, the Spot of Bother is quickly retraced.
Nonetheless, doubts remain and fundamental data is still weak; this overhang of negativity rebuilds the wall of Worry.
Some Bears will reckon the weakened market will double-top, i.e. be unable to break out to new highs given the poor fundamentals, and as a result we can anticipate a nominal new high after the Wall of Worry has been rebuilt, just to destroy all those who reckoned a double-top would mark The Top.
Mr. Market (and the central banks) won't make it that easy to reap a fortune by going short.
As the market lofts to new nominal highs, the remaining Bears will be hesitant to go short, and Bulls will note that despite the dire warnings of analysts and the gloomy data on auto sales, credit expansion, productivity, wages, etc., the market keeps chugging higher.
This will infuse participants with complacency and a general sense that the market has weathered the worst than could be thrown at it.
When the surviving Bears have become wary, and the market's resilience in the tide of negative news seems to point to further gains--at that point, the market finally rolls over and "surprises" everyone.
Nice, but when will this happen? Nobody knows, but the key is there can't be a crowd of analysts predicting a decline and begging everyone to go to cash. There can't be huge short interest and massive bets on higher volatility. Everyone betting the farm on a decline and a spike in volatility must first be destroyed before the market can possibly fall.
The crash has to catch almost everyone off guard--those who lost their shirts betting on the market responding rationally to deteriorating data (i.e. those who bet on rising volatility and a market decline), those steeped in complacency and those secure in their quasi-religious faith that the central banks "have our backs and will never let the market drop."
When these conditions are met, the Crash-o-Meter pegs the upper limit of vulnerability.
Pavlovian training is deeply embedded, so the first drop will trigger a Buy the Dip frenzy. This reverses the downturn and creates the last exit point. But so well-trained are traders, few take the last exit; most feel assured that further gains are just ahead.
Central banks are presumed to be all-powerful, and the past 8 years support the conventional belief that a new central bank policy announcement will always reverse any downturn.
But contrary to expectations, selling momentum builds and the trading bots start selling in earnest, the goal being to liquidate the position entirely to escape risk. Central bank pronouncements steady the market and trigger wild spikes higher--but only for a few hours. Things have changed. Central banks cannot reverse the tide of fear, and spikes higher are seen as selling opportunities.
Alas, every bot has the same goal, and the bid disappears. That's one crash scenario; there are many others. The one thing we can know with certainty is it won't be easy to profit from the crash.


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Friday, June 23, 2017

The Over-Criminalization of American Life

The over-criminalization of America has undermined justice, the rule of law and legal egalitarianism.
While the corporate media devotes itself to sports, entertainment, dining out and the latest political kerfuffle, America has become the Over-Criminalization Capital of the World. The proliferation of laws and administrative regulations, federal, state and local, that carry criminal penalties has swollen into the tens of thousands.
The number of incarcerated Americans exceeds 2.3 million, with the majority being non-violent offenders--often for War on Drugs offenses.
Holly Harris has written an important summary of this profoundly destabilizing trend: The Prisoner Dilemma: Ending America's Incarceration Epidemic (Foreign Affairs, registration required).
The over-criminalization of America is a relatively recent trend. As Harris notes:
It wasn’t always like this. In 1972, for every 100,000 U.S. residents, 161 were incarcerated. By 2015, that rate had more than quadrupled, with nearly 670 out of every 100,000 Americans behind bars.
The over-criminalization of America is rooted in federal laws and regulations, and state and local governments have followed suite. here is Harris's account:
The burgeoning U.S. prison population reflects a federal criminal code that has spiraled out of control. No one—not even the government itself—has ever been able to specify with any certainty the precise number of federal crimes defined by the 54 sections contained in the 27,000 or so pages of the U.S. Code. In the 1980s, lawyers at the Department of Justice attempted to tabulate the figure “for the express purpose of exposing the idiocy” of the criminal code, as one of them later put it. The best they were able to come up with was an educated guess of 3,000 crimes. Today, the conservative Heritage Foundation estimates that federal laws currently enumerate nearly 5,000 crimes, a number that grows every year.
Overcriminalization extends beyond the law books, partly because regulations are often backed by criminal penalties. That is the case for rules that govern matters as trivial as the sale of grated cheese, the precise composition of chicken Kiev dishes, and the washing of cars at the headquarters of the National Institutes of Health. State laws add tens of thousands more such crimes. Taken together, they push the total number of criminally punishable offenses in the United States into the hundreds of thousands. The long arm of the law reaches into nearly every aspect of American life. The legal scholar Harvey Silverglate has concluded that the typical American commits at least three federal felonies a day, simply by going through his or her normal routine.
Federal policies reward states for building prisons and mandating harsher sentences:
...federal incentives for states that safely decrease their prison populations and reconsider ineffective sentencing regimes...would represent a stark reversal of legislation signed into law by President Bill Clinton in 1994, which did just the opposite, offering federal dollars to states that imposed harsher criminal penalties and built more prisons, which contributed to the explosion of incarceration rates during the past two decades.
How did we become a Gulag Nation of tens of thousands of laws and regulations and mandatory harsh sentences for non-violent crimes--a society imprisoned for administrative crimes that aren't even tried in our judiciary system? I would suggest two primary sources:
1. The relentless expansion of central-state power over every aspect of life. As I describe in my book Resistance, Revolution, Liberation: A Model for Positive Change,the state has only one ontological imperative: to expand its power and control.There are no equivalent mechanisms for reducing the legal/regulatory burdens imposed by the state; various reforms aimed at reducing the quantity of laws and regulations have not even made a dent in the over-criminalization of America.
The second dynamic is the political reality that the easiest way for politicos to be seen as "doing something" is to pass more laws and regulations criminalizing an additional aspect of life. The state and its elites justify the state's relentless expansion of power and control by claiming problems can only be solved by centralizing power further and increasing the number and severity of penalties.
Criminalization is the ultimate expansion of the state's monopoly on coercive violence. As the state expands its power to imprison or punish its citizens for an ever-wider range of often petty infractions, increasingly via a bureaucratic administrative process that strips the citizens of due process, another pernicious dynamic emerges: the informal application and enforcement of formal laws and regulations.
In other words, the laws and regulations are enforced at the discretion of the state's officials. This is the systemic source of driving while black: a defective tail-light gets an African-American driver pulled over, while drivers of other ethnic origin get a pass.
This is also the source of America's systemic blind eye on white-collar crimes while the War on Drugs mandates harsh sentences with a cruel vengeance.When there are so many laws  and regulations to choose from, government officials have immense discretion over which laws and regulations to enforce.
Prosecutors seeking to increase their body count will use harsh drug laws to force innocents to accept plea bargains, while federal prosecutors don't even pursue white-collar corporate fraud on a vast scale.
The over-criminalization of America has undermined justice, the rule of law and the bedrock notion that everyone is equal under the law, i.e. legal egalitarianism.
The over-criminalization of America breeds corruption as the wealthy and powerful evade the crushing burden of over-regulation by either buying political favors in our pay-to-play "democracy" (money votes, money wins) or by hiring teams of attorneys, CPAs, etc. to seek loopholes or construct a courtroom defense.
Meanwhile, the peasantry are offered a harsh plea bargain.
The over-criminalization of America is one core reason why the status quo has failed and cannot be reformed. That is the title of one of my short works, Why Our Status Quo Failed and Is Beyond Reform, which explains why the ceaseless expansion of centralized power leads to failure and collapse.


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Wednesday, June 21, 2017

Automation's Destruction of Jobs: You Ain't Seen Nothing Yet

Employers have no choice: it's innovate/automate or die.
Automation--networked robotics, software and processes--has already had a major impact on jobs. As this chart from my colleague Gordon T. Long illustrates, the rise of Internet technologies is reflected in the steady, long-term decline of the labor force participation rate-- the percentage of the populace that is actively in the labor market.
The oft-repeated fantasy is that every new wave of technological innovation creates more jobs than it destroys. Not this time: the total number of full-time jobs has stagnated for years, and most of the new jobs that have been created are in low-wage, moderate-skill positions that cannot move the productivity needle much: jobs such as those in the retail and restaurant sectors.
Real wealth isn't created by printing currency or jacking up stock valuations--it's created by increasing productivity. As this chart reveals, productivity has stagnated for years. This is a complex dynamic, but we can surmise that the low-hanging fruit of automation has already been harvested, and the addition of jobs that are inherently limited in the productivity gains that can be achieved are core components in stagnating/declining productivity.
I have often discussed productivity and economist Michael Spence's framework of tradable and non-tradable labor. You want a beer-bottling machine? That's a tradable good; it can be manufactured anywhere in the world. You want a beer at the local tavern? That is non-tradable--it is a service that can only be provided locally.
The problem is non-tradable labor is typically impervious to productivity gains: even the most experienced bartenders can only draw so many beers and mix so many drinks in an hour. A retail salesperson can only help so many customers in an hours, a gardener can only mow so much lawn in an hour, and so on.
As Gordon and I discuss in our new video program, Robotics & Chronic Unemployment, automation is now entering these non-tradable sectors with a vengeance. Sectors dominated by non-tradable labor include taxis, local trucking, long-haul trucking, delivery services, courier services, retail, restaurants, fast food, and so on.
Every one of these sectors is perched on the precipice of dramatic disruption by automation. Self-driving vehicles, drone deliveries, self-serve kiosks, robotic store clerks that have the entire store inventory available to answer customer questions--the list of automation advances in once-safe sectors is almost endless.
The driver is the need for productivity increases. Labor costs keep rising, especially for labor-overhead expenses such as healthcare insurance and pensions. The cost of living keeps rising, pushing wages higher.
If productivity can't be increased, the only alternative is to raise prices. But consumers, even at the high end, are reaching their limits. When meals that cost $20 now cost $30, consumers start opting for cheaper alternatives.
Corporations and small businesses alike can only trim production costs and keep prices fixed for so long before profits vanish.
Enter automation. The new technologies are now giving enterprises the tools to increase productivity in these previously low-productivity non-tradable sectors.
While we can collectively fret over this need to increase productivity and the resulting decline in paid labor, the employers have no choice: it's innovate/automate or die.
Even local, state and federal government agencies and contractors, heretofore impervious to soaring labor and overhead costs, are about to feel the urgent need to automate as a survival technique as budgets turn red in rising deficits and taxpayers revolt against ever-higher taxes.
There are no safe sectors any more because unrestrained cost increases are killing the economy. Healthcare is a runaway train, and all the buffers that enables prices to go to the moon are gone: we can't even afford the limited Medicare we have now, much less Medicare for All.
It's not just low-skill jobs that are being destroyed. Look at the automation of financial services and trading. In the near future, if you want human service, you'll have to pay extra--if it's available at all.
There is a self-reinforcing dynamic to job losses and stagnating wages. As households receive less income, they must tighten their belts, further pressuring government and private enterprise alike to do more with less costly labor.
Given a choice between a lower-cost automated service and a higher-cost human-labor service, the bottom 95% will have to choose the automated service.
If a fast-food meal at a kiosk is $5 and the one served by a human is $6, which will people choose? I have described the difference in my book Get a Job, Build a Real Career and Defy a Bewildering Economy: this setting is low-touch--the human interaction doesn't create much value for the customer, so they aren't willing to pay a premium for it.
the same is true of most non-tradable sectors.
The coming destruction of jobs will be monumental, unstoppable and long-term. Gordon Long and I discuss the effects of robotics and automation on jobs in this 27-minute program:



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Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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Monday, June 19, 2017

What Is the Market Telling Us?

The entire global economy now depends on this stripped-of-information "market" for its stability.
Ho-hum, another day, another record high in the S&P 500 (SPX). What is this market telling us? If you're long, the market is screaming "you're a genius!":
But other than that, what else is the market telling us? Is it telling us anything about the real-world economy and the open market for equities based in that real-world economy?
Before we can answer "what is the market telling us?" we must first ask, "what can the market tell us?" That is, what is the current market capable of communicating?
This is the key question, for as we all know central banks have intervened in the market in an unprecedented fashion for over eight years. Central banks have transformed stock markets into signaling devices that are intended to boost the perception of increasing wealth, whether earnings and productivity are actually increasing or not.
The idea is to generate a "wealth effect" that encourages people to borrow and spend more as they feel their wealth is increasing. This "wealth effect" borrowing and spending will (so goes the assumption) overcome the stagnation of wages and spending, and spark a gloriously self-reinforcing consumer credit-spending binge.
This is considerably different from an open market of decentralized buyers and sellers, which reflects statistical data and sentiment regarding the real-world economy of sales, profits and productivity.
Traditionally speaking, the stock market is a discounting mechanism, that is, the market absorbs data about the present and projects that into the future. If growth appears to be slowing, the market discounts future earnings and stock valuations decline accordingly.
If growth appears to be picking up, the market increases its expectations of earnings and valuations expand accordingly.
But even though global growth is visibly slowing, stock markets keep going up.
What gives?
There are several dynamics in play. One is that human players now account for no more than about 10% of market activity; the rest is robots and ETF (exchange traded funds) buying and selling.
Another is that central banks have been major buyers of ETFs and stocks, and this is unprecedented. The Swiss Central Bank is now a major shareholder of Apple and Amazon, and the Bank of Japan owns a significant chunk of Japanese ETFs.
Central banks once bought assets such as bonds and futures as a temporary plunge protection team tactic to stop a downturn from accelerating into a rout or crash. Now they are buying trillions of dollars in bonds and stocks during so-called "good times" to keep the market lofting higher even as growth slows.
This permanent intervention via buying stocks has distorted what the market can tell us. Rather than communicate a sense of how the real economy is doing, the market now reflects the will of central banks to keep the market lofting ever higher on the back of central bank purchases and liquidity.
This has created a disconnect between the market and the real economy, a gulf that widens daily. Can it continue? Yes, as long as central banks keep buying stocks and increasing liquidity.
But there is a cost to this manipulation: there is little information left in the market other than the enthusiasm of central banks to push valuations higher and suppress volatility.
This lack of reality-based information and the homogenizing of sentiment leaves traders and owners alike with a false sense of confidence, and sets up a Titanic Mindset: hey, we can maintain full speed through this dangerous ice field in a flat-calm sea because this ship is unsinkable: the "experts" told me so. What can a crummy little iceberg do to an unsinkable ship other than inconvenience the passengers? That's a risk we'll take.
The entire global economy now depends on this stripped-of-information "market" for its stability. It's difficult to see this as healthy or sustainable.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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