After QE; Piketty and neo-feudalism

There is a lot of nonsense going around about interest rates going up post-QE. Following John Hussman's lead, in a recent post I showed the empirical regularity governing the relationship between central bank balance sheet as a percent of GDP and long-term interest rates proxied by the 10 year T-bond.

Recently Base/GDP has been about 0.22, so we are way out on the right end tail. It would take a reduction of the ratio of about 15 percent of GDP to begin to raise long rates, or about $2.6 trillion at current rates of GDP. The St. Louis base is currently at $3.7 trillion, and has been growing at over 20 percent a year since the last recession.

Now, "tapering" is a reduction in the rate of increase of additions to the base, not a reduction of the base. The chart looks to me like a very strong empirical regularity indeed. So the chance that long rates will rise anytime soon is remote in the extreme, as the Fed has no announced plans whatsoever to actually reduce the base.
Long rates will remain low and the bad debt clogging the banking system will remain impacted, that much seems assured for years to come.
What is a somewhat lower probability outcome is that the dump-the-dollar movement internationally gains sufficient momentum that the Fed has to buy up more and more (perhaps virtually all) new Government debt. This might be called the MMT-by-force-majeure outcome, as there is little chance that such additions to the Fed's balance sheet will ever go away.

In this latter case rates will not go up because of the empirical regularity shown above, but as the dollar falls on the foreign exchange markets due to weak demand to hold or trade in dollars, there will be import inflation domestically in the US. This will cause a further collapse of effective demand--already afflicting the bottom 80 percent or so of Americans--as real purchasing power of consumers is decimated. The US will become an even less attractive place to invest, and capital flight will occur. The US's status as a banana republic will be cemented.

This is the essence of the dreaded global currency reset: the dollar falls on international markets, import inflation slams domestic real demand, but neither short-term nor long-term interest rates rise (short rates exhibit a similar empirical regularity to that shown above). A domestic stagflation occurs. The Fed, ever the servant of Capital, will fight the inflation with modest rises in short rates (this can be done administratively in the short run) sufficient to beat any thought of asking for higher wages out of the heads of workers even though labor cost-push inflation exists only as a curiosity in economic history textbooks.
In the final chapter plutocrats of various "nationalities" (with allegiance to none) will divvy up Plantation America, keeping the best parts of it private, for themselves and their would-be-royal progeny.

Enter the Anti-Mainstream Economist

Certainly Thomas Piketty is the most important economist of the past 80 years, since the last Fourth Turning (Keynes got it that time). I highly recommend The New Yorker's review of his big book (here). A Frenchman, Picketty came to the US at 22 as a young economics superstar and to his great credit, became immediately disenchanted (disgusted is a better word, probably) with the status-quo-supporting mathematical fictions he encountered at MIT. (Disgust afflicted your correspondent upon entering economics at the graduate level in search of "science" after an undergraduate career studying literature.) Son of a leftist French couple, Piketty imbibed the Marxist notion of capital increasingly displacing labor leading to the reserve army of the unemployed and set out to study the issue of the distribution empirically, probably sensing that only real world data could displace the mathematical fictions of the self-congratulating, narcissistic mathematical economist-priests ruling policy in the West.

Piketty's concerns over where the world is going are as dire as mine. He is the Anti-Mainstream economist on the white horse that I thought could never possibly arrive. The New Yorker disappointingly pooh-poohs Piketty's suggestions that we need to raise taxes on the incomes and wealth of the plutocrats as politically infeasible. (But of course The New Yorker’s readership inhabits the status quo, so what else could they say?)
Democracy will have to be reborn to prevent a return to out-and-out feudalism.
It couldn't happen here, of course (although Piketty now has a stateside ally in fellow French-born Berkeley economist Emanuel Saez). Piketty turned tail after a couple of years in the US and returned to Paris, where he has remained since.

[Editor: spelling of Piketty's name corrected 3/27/2014]

Fiat money = funny money => Fed must screw labor

h/t Mish for pointing out an article by Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority, a member of the UK’s Financial Policy Committee and the House of Lords, suggesting that the Fed or any fiat money central bank might accept conversion of assets on its balance sheet, i.e., Treasuries, into zero coupon perpetuities, and so create "helicopter money" and permanent monetization of the sovereign debt.

I suggested just this strategy as a joke some time ago (here).

However, we all knew that the Fed can and does print money. But stating it as baldly as this brings me back to the problem this causes in the labor market.

As I have said repeatedly, inflation (a sustained wage price spiral inflation) is always and everywhere a labor market phenomenon accommodated by monetary policy.

Thus, with the vast overhang of base the Fed must worry about inflation in the long run, even if not so much right now. Why not now? Because prosumers are overburdened with debt and inflation is nowhere raising its ugly head. Looking more deflationary now, it is.

But should actual deleveraging take place by some other means than a few bad debts actually being charged off (imagine that!), such as bad debts being recognized as such (FAS 157 thrown out, good riddance) and debtors finding relief as the (unpaid) debts hit statute of limitation dates with no more recourse--then the Fed would have to worry about a wage-price spiral getting going.

In other words, the Fed is intrinsically anti-labor and always will be. What did Paul Volcker teach us, if not that? You got to recruit some cannon fodder, some inflation fighters to win the war on inflation.

There's an interesting wrinkle in here in that Janet Yellen has allegedly stated her desire to see the labor force participation rate improve, while at the same time worrying that it will adversely impact the unemployment rate (duh!) and hence, confidence. (My readership is small but highly intelligent and knows that if discouraged workers are included the unemployment rate is well above 10 percent by the governement's own questionable figures.)

I do believe the Fed economists are aware of the psychological importance of the unemployment rate that the unknown economist whose work I channel has established, and which the econophysicists seem to appreciate far more than the professional economist (i.e., generally establishment cheerleaders) community does.

Sometime within the next few years the unemployment rate will meet its falling adaptation level and rise above it. That is when we will see the next collapse of confidence. So the model predicts.

In passing I note that MMT does not really offer a way out of the wage price spiral problem. They just seem to be willing to inflate the debt out, disco style. However, the danger of hyperinflation may be greater this time, given the size of the base, and they seem oblivious (to me) to the Austrian distributional implications that those who get new money first can increase their wealth at rates much faster than those depending on increasing real wages can expect.

To bing this discussion full circle, let's ask what comes next for the international monetary system? Does an IMF ADR basket currency make the central banks love labor any more? I think not. Unless they're playing competitive devaluation games, they still can't afford too much inflation ("a little inflation is a good thing, but not too much"--this is the mainstream cant).

Given the plutocratic distribution in the world today, it seems to me that any fiat money system broadly adopted is going to result in labor continually getting screwed, absent really aggressive incomes policies (guaranteed basic income and health care, for example; or even better, enforced limits on wage contours, now being challenged even in Sweden, such is the prevalence of greed in the current historical moment).

History shows that a metal based system achieves stable prices over long periods. Sorry, "Rich Dad, Poor Dad," you're not a genius for investing in real estate. To paraphrase Paul Samuelson, during an inflation every fool is a great financier. It takes no brains to load up on debt when inflation is guaranteed.

Are there financial crises under a metal standard? Yes, just like under fiat banking as it rides into its sunset. The answer to cyclical variations is always to let them happen, to concentrate on stabilizing people and not "the business cycle," to take care of displaced persons during the adjustment. And to keep banks out of the business of speculation with other people's money.

 

How monetary policy drives foreign policy

It should now be evident that America's foreign policy is to an extent being driven by our banking mess. Again and again, we see Washington, including Wall Street's handmaiden, the Fed, exporting monetary chaos implicitely in order to weaken the status of potentially competing reserve currencies:

• Wall Street sent a tsunami of bad AAA-rated mortgage debt to Europe, much to Germany, the locus of power for the Euro (and again, implicit admission of guilt is seen in the apparent fronting of billions of bailout dollars to the European banks by the Fed after the crisis);
• Washington has apparently fomented or supported a coup in the Ukraine that increases the likelihood of war in Europe dramatically therefore sending the gigantic pools of liquid financial assets in the world scurrying into the greenback and US Treasuries, which the Chinese have stopped gobbling up;
• the other factor is that the military-industrial complex needs war to get its funding, and when drone-bombing rag-heads can't provoke a serious attack, destabilizing a former Eastern bloc nation and provoking a somewhat justifiably paranoid Russian leader into military action guarantees at least a shot in the arm of crisis funding.

Russia has repeatedly stated over the past decades that an EU move on the Ukraine crosses a red line. The EU ignored the warning, and with the US's help and the ire of Ukrainians sick of a corrupt government crossed Putin's red line. What the Ukrainians want is democracy and relief from their corrupt plutocrats (see previous post's article by Paul Craig Roberts).

The US has no compelling strategic interest in the Ukraine, or in the Crimea remaining part of the Ukraine. Yes, the Ukraine has been looted by its oligarchs, just as Russia was, and just as the US is being looted by its oligarchs right now; incomes of a majority of American households are falling so the banks can collect on bad debts. It would be nice for people everywhere if they could break the grip of the plutocrats over their livelihoods. In the Ukraine, to substitute debt servitude to Western banks for the domination of the oligarchs would only accelerate the collapse of the EU. And it's not clear the EU, if it offers help, won't be ripped off by the oligarchs as well. The new government in the Ukraine has already increased the power of the oligarchs by giving them provinces to rule, so it's not clear the Western "rescuers" are even able to help solve the fundamental problem at all, and might end up losing their shirts again, as they have in Greece, Portugal, et al.

Until democratic governments around the world become strong enough to counteract the power of the plutocrats by taxing them, both their income and their wealth (as Sweden does) the revolving looting of sovereign governments and demolition of middle classes by the plutocrats and their corporations will continue.

A couple of posts ago I said the scariest thing I've heard recently was Catherine Anne Fitts saying what the world needs now is a global debt for equity swap. I should say I generally like Ms. Fitts' analysis and suspect she may even have misspoken when she made this comment. Such a move would concentrate ownership of the world's assets sufficiently to create even more of a Plantation Earth than we have currently.

She identified the problem, but not the solution. What the world needs now is a global jubilee, debt forgiveness. The debt that the Fed is shoving under the carpet via QE is what is known in banking circles as "bad debt." It is loans that never should have been made because they will never be repaid. In honest not crony capitalism such debts come out of the profits (as losses) of the banks that made them. In crony capitalism, with a central bank controlled by the banks, such debts are "paid back" by being monetized and put on the backs of the taxpayers either directly or through inflation.

The austerity programs Europe has put in place so that Wall Street and European banks can be paid back bad debts have destroyed more than one economy and more are probably yet to fall. (The idea promoted ten plus years ago of "convergence" of interest rates in the EU between periphery and core caused me to gag at the time.) Debt slavery to Western banks is not the answer. (China is apparently making similar mistakes; it will be interesting to see what they do with the bad debt. I suspect their strong central government will tell the bankers to go stuff it.) Ms. Fitts suggests that sooner or later the plutocrats will destroy the banks in order to buy them cheap and collect the rents themselves, canny suggestion indeed.

Chaos in the world = a strong dollar. Until it doesn't. Chaos has a way of being unpredictable.

Capitalism has killed democracy. "Free" markets dominated by monopolies and oligopolies are not what Adam Smith had in mind. It's time for democracy to be reborn. There are degrees of economic inequality that are simply immoral and destructive and humankind has the right to reject them. When the top 85 families own as much as the bottom 3.5 billion people, as recently reported, we have reached such a point.

‘Animal spirits’ update

The approach taken to confidence determination here stipulates that, for the most part, confidence levels are determined by whether unemployment is above or below what people are used to, an adaptation level modeled as an exponential moving average over the past four years. When unemployment is below the adaptation level, we feel good; and conversely. Thus, in the 1980s, when unemployment came down from double digit levels to 9 percent, that level produced gains in confidence. Currently the adaptation level is at 7.8 percent and unemployment is at 6.7, so in theory we are “confident” (as I have mentioned, I don’t quite know why the median income household—really everyone below about the 90th percentile—has not lost confidence completely; we know the top 10 percent are confident, and for the most part completely out of touch with what is happening in the country.)

What is remarkable about this simple theory is that it is very sensitive to identifying the beginnings of the downward cascade of economic activity—and upward shooting of the unemployment rate—that occur at the outset of recessions.

The forecast in blue assumes the following judgmental forecast for unemployment:

Now it is possible that unemployment will bounce along a bottom at about current levels for longer than I have assumed, but in this theory of the business cycle confidence will always fail when the adaptation level comes down to the current unemployment rate. Note in the graph above that the crossover point is almost always exactly when the NBER defined recession begins, and when unemployment accelerates upward.

The negative skewedness of the first differences seen here is also seen in stock prices, which arguably follow a very similar type of adaptation-level theoretic dynamic, at least in part.

The current period is morphologically similar to the early 1970s, before the recession began, with the Michigan Consumer Sentiment series lagging (green in “animal spirits” chart). If we follow that pattern the collapse will be sudden.

My judgmental forecast puts the start of the collapse a year from now, in February 2015, but my forecast includes increases of 0.1 percentage points a month starting in about six months. I cannot comment on the calculation of the unemployment rate authoritatively, but many have found the sharp decreases in the labor force participation rate to be anomalous. (It was amusing and sickening to hear that Janet Yellen is worried that the labor force participation rate might increase from its generation low and cause the unemployment rate to go up. She and the Fed are apparently aware of the underlying model referenced here even if here book-writing husband’s book on “animal spirits” doesn’t reference it.)

If we are at something like “peak false consciousness” (again) it won’t take much to prick the bubble, especially as the unemployment rate and adaptation level converge.

Global currency reset: is it real?

The Intertubes are buzzing with talk of a global currency reset, usually in conjunction with a sale of a DVD that the seller alleges contains secrets that "the elite" have imparted to him that will make the difference between survival and adject ruin in your life. The most cogent of these is by Pastor Lindsey Williams here.

The basic argument is that Christine Lagarde has secured agreement from some 204 nations to enter into a new managed float currency system that, however, will move currencies toward new exchange rates based on national "assets." America, being the premier debtor nation in the world, would be devalued in its new channel, especially relative to the yuan. This of course is what a lot of people would like to see happen to stimulate exports. This system is allegedly to be kicked off by the end of first quarter 2014. There will be some sort of gold-backed or basket-based new international reserve currency introduced.

Obviously America is hit by stagflation as goods from China increase in price by 30 percent or so. Simultaneously the government in 2014 or 2015 will seize 30 to 50 percent of public and private pension funds to pay down government debt.

I have little doubt that the dollar's reserve currency status is weakening. Many significant trade deals have been recast in the past few years out of dollars into other currencies, or in some cases, into commodities. But if such negotiations for a global currency reset have taken place they have been kept very quiet.

The problem I have with this story is that it conflicts with what I see as the most likely outcome, the credit supernova, in which all countries succumb to temptation to beggar the rest of the world to inflate out their debt and depreciate their currency. America's dominance and relative safety (note the negative yields on recent T-bill auctions) would seem to augur a relatively strong dollar in such a supernova scenario.

However, Williams does make a credible case that the American economy will totally collapse in 2015 when the business mandate of Obamacare takes effect. The press has recently given coverage to the profit guarantees that the health insurance companies enjoy under Obamacare. Recent retail sales numbers certainly suggest a collapse of demand (see this).

The good pastor also maintains that the smart meters that have supposedly been put on most American houses are in fact microwave mind control devices that have softened up the population for the imposition of the totalitarian new world order without violent resistence (this seems to entirely based on the allegations of one Barrie Trower, a British physicist).

What economists call "effective" demand collapses when most people's incomes are falling, even if total income (GDP) is ostensibly rising. The rich just don't spend enough or on the right things to keep the circular flow going in a healthy way. And when the most attractive investment opportunities are offshore, anyone with a mutual fund can send their capital abroad. Add to this the bad debts of the banks that they have transferred onto the backs of the American (and Irish, and Spanish, and Portuguese...) people and the stage is indeed set for collapse. The question will be whether the rich will push the poor into a die-off (life expectancies are already declining among the lower classes in America, and probably elsewhere) or whether the population of the world will learn to share in the context of a just society.

In any event, we'll see if there's anything to all the fevered talk about the "global currency reset" within 90 days.

 

Inequality forever: the (hidden) neo-feudalist agenda

I read a lot of different blogs, mostly for their links. I have little interest in reading Yves or Michael Snyder, but they both provide lots of high-quality links, so I frequent their blogs. Some blogs I won't go to, like Brad de Long's, simply because the stench of the self-satisfied Establishment is too much.

What I find tragic about the libertarians like Mish and about the Evangelicals like Michael Snyder is that they are apparently willing to play so readily into a Government-destroying gambit that opens the way for those in control of vast wealth, the 1 percent, so to speak, to bankrupt governments worldwide and then buy up their assets at trivial prices as occurred after the fall of the Soviet Union; in other words, to take the world into the new world order dreamed of by Rockefellers and other Illuminati for generations, a neo-feudalism enforced by financial fascism through a world-wide fiat money system run by the Bank of International Settlements, which there are the lords and ladies of wealth over the debt-serfs, everyone else. Snyder even had a link to a Carroll Quigley quote on this from the Sixties.

Depression conditions are known to foster fascism, but the indicated depression conditions don't seem to bother the Evangelicals or the libertarians.

But history is nonlinear, and I maintain hope that in the Crisis to come a new viable democratic form will emerge.

‘Animal spirits’ and the natural unemployment rate

The San Francisco Fed reports median estimate of the natural rate of unemployment in 2013 is 6.6 percent (source). Other estimates put the rate at 7.9 percent (source). Assume the current unemployment rate is the current natural rate, at 7.3 percent. How long until confidence collapses if the rate remains fixed at that level? Obviously it will take infinitely long for the adaptation level to converge to the current level, but when does it get within 0.1 of the adaptation level? That actually doesn’t occur until March 2016. But this is not a realistic path.

The crossover from “unemployment rate below adaptation level” to “unemployment rate above adaptation level”—the signal of collapsing confidence—is always preceded by a leveling out of the smoothed (12-month MA) unemployment rate, which has not yet happened. This is a necessary but not sufficient condition for a collapse of confidence to be imminent.

We will monitor developments for this occurrence.

Fourth turning update

The entertaining Jim Quinn has put up the third in his series of "Trying to Stay Sane in an Insane World." Quinn works at Wharton and his website is either one of the cleverest honeypots around, or Wharton — a bastion of, let's face it, Wall Street think — actually allows some free speech.

However, here's my response to the Austrians who say — who chant — "Government bad! Government bad!" — and, "Free markets good! Free markets good!"

Feudalism bad! The Middle Ages were based on a system of highly concentrated ownership of the means of production, which at that time was mostly land. You had your lords and your serfs. With the assistance of rapidly improving technology are getting closer and closer to a new age of feudalism.

The Crisis still looks to peak after 2020. Buckle up.

Freedom’s Sunset

I am pleased to recommend a new thriller, Freedom’s Sunset, which is currently in the top 50 in Amazon’s political thriller category.  Please support this new author by reading the book and (if you like it) giving it a five-star review. Amazon’s algo's are very sensitive to the reviews.

Book Description

Are you concerned about the collapse of the American economy?  Here is a thriller about the collapse of the Soviet empire that provides historical insight into that collapse. It is June 1990. Mikhail S. Gorbachev, President of the Union of Soviet Socialist Republics, fears that his policies of glasnost--openness--will cause the union to split apart.  The Berlin Wall fell in the past November. 

His political rival, Boris Yeltsin, appears to be gaining popularity. On a cold day Gorbachev comes to Minnesota in the American heartland for a historic visit. A product of the Russian countryside himself, Gorbachev is happy to be free of the intrigues of Washington, D.C. and Moscow for a day. 

But he will face an encounter with Zack Pedersen, a troubled youth from South Dakota, on Summit Avenue in St. Paul that sheds light on two very different empires in different stages of collapse.

Written in a style combining John le Carré with The Hunger Games, this book will appeal to those around the world who yearn for freedom and are willing to pay the price to keep it. The story contains strong language and adult themes.

This book includes a lot biographical flashbacks on Gorbachev’s life.  Reviewers find that it provides a lot of historical insight into the collapse of the USSR, and what has happened there subsequently.  Gorbachev’s personal story is especially compelling.

Russia currently has a sovereign debt to GDP ratio of approximately 10-15 percent.  They defaulted on much of the USSR’s debt.  Putin must be laughing at the what the bankers are doing to the Europeans.

Reflections on the debt supernova

It should be evident now that "money printing" is not a sufficient cause of inflation or hyperinflation. Excess reserves pile up in the banking system and the Fed ends up "pushing on a string" with little effect on either price level or output. Hence John Williams' massive miss on his hyperinflation call. The first Great Depression taught us this.

Wikipedia helpfully defines two trigger mechanisms for hyperinflation: the "velocity" model and the "money in circulation" model. Also, please recall my fundamental definition of inflation:

Inflation is a labor market phenomenon, i.e., a wage price spiral, accommodated by monetary policy. Here I am adopting the "economics" definition of inflation as a general rise on the price level.

Now, so long as the capitalists continue to subject labor to diminishing real incomes, the only inflation that can exist is asset bubbles, financed by the increasing incomes of the capitalist class. While there is at least a feeble attempt by households to rebuild balance sheets, filling up one's gas tank with gas to beat rising gas prices does not constitute a sufficient increase in the velocity of money to trigger a hyperinflation. Fundamentally, the budget constraint on the vast majority of real incomes precludes accelerating inflation. So much for the velocity means of triggering a hyperinflation.

With the recent speculation that Lawrence Summers is the President's favorite for the new Fed chief, there is some reason to attend to the "money in circulation" model of hyperinflation. Summers is an advocate of taking on lots of new federal debt to stimulate the economy. The way that this will be accomplished may end up being a close facsimile of the Modern Monetary Theory prescriptions in that the Fed will essentially print these dollars and send them into the economy as "new money in circulation" through the Treasury. However, Janet Yellen is likely to do the same thing.

There is certainly an argument for undertaking large infrastructure projects while interest rates are extremely low. And the massive increase in debt is consistent with Sornette's estimations of the worldwide debt bubble's trajectory referenced a couple of posts ago. (Ron Paul has suggested that the Fed might simply forgive such debt held by the Fed, which would make it a pure MMT exercise.)

The point being that much of such spending might conceivably flow to the people as incomes (although the last bout of stimulus demonstrably did not, some 90+% of it winding up in the pockets of the 1%) and ignite an inflationary or hyper inflationary outcome. But I doubt it. More likely I think is that essentially carry trade-generated asset bubbles persist wherever the hot money flows, while labor's compensation remains stagnant. The vanishing middle classes around the world will experience stagflation, but not concomitantly rising wages.

Hence, Sornette's finite time singularity is likely to be profoundly deflationary when the bubble pops. There might at last be something like a global debt jubilee around 2020, simply because the debt service finally overtakes the ability of markets to absorb the debt required to pay it. This will be the End of the Modern Age, possibly, if complete monetary chaos halts much of international trade. The 2020s may be the decade when large scale barter becomes the norm between nations.

In the CIA's humint (human intelligence) areas, the study of faces is a recognized discipline. One needs to know very little about Lawrence Summers to realize he is a complete ass. The only public faces in recent memory that show such obvious bad intent are those of Phil Gramm and Paul Wolfowitz.

But it doesn't matter who is appointed to the Fed chair, because Janet Yellen will do the same thing as Summers, only possibly less aggressively.

 

Will consumption collapse?

Running at about 70 percent of GDP, consumption has been above long-term averages for a while, with much of it financed by debt.  Households are deleveraging where they can.  Where will consumption go?

Of course, for the majority of consumers, the weakness in real disposable income has been greater than depicted because of the great degree of inequality in the income distribution.  Government spending won’t pick up the slack, and neither will investment, from all appearances:

‘Animal spirits’ update

N.B. This is research, not investment advice.  You invest at your own risk, unlike the Wall Street banks, who also invest at your risk. 

The uptick of the unemployment rate from 7.8 to 7.9 has caused our ‘animal spirits’ indicator to put in a top.  Continued increases or merely stability of the unemployment rate will cause further losses of confidence.

The underlying judgmental unemployment rate forecast is this:

My forecast is still that the US economy enters recession in the second half of 2013.  The two big proximate drivers:  the continuing assault on consumption from higher taxes and medical costs; a precautionary demand for liquidity (increased saving rate); the sequester—to any degree—of federal government spending; and to the extent that it impacts the small segment of the population current salivating over stock market gains induced by QEternity, a diminished wealth effect (yes, the implicit stock market forecast is that we’re at a major top—I called it a year ago but the presidential election year got in the way—this cycle is very reminiscent of the early 1970s, and we’re at about the turn from 1972 to 1973).  Throw in Europe in various states of severe recession and depression, and the likelihood of some slowdown in China, and we have the potential for a coordinated global contraction, almost as if the signs all say we are at the end of the [high?] growth age….

Here is the whole history:

Note how depressed the Michigan Consumer Sentiment index is, just as it was in the early ‘Seventies.  The drop-off from here could be precipitous from here.  Even somewhat proven indicators such as the “Rule of 20” show the market looking toppy (yellow line is where the blue S&P line is supposed to be):

Source:  News-to-Use

Moral Hazard R US

Forbes recently ran a story describing QEternity as basically a gigantic money laundering operation (here). The bad assets go into the Fed at pretend and extend prices in return for high-powered reserves money. The HSBC settlement proved that bankers are above the law, that too big to fail is too big to prosecute.

The financial sector of the US is poised for a fall.

 

US Effective Demand

Source:  FRED  Both charts are percent change from a year ago, data to 2012Q3.

Will exports pick up the slack?

When short-term irrationality is long-term rational, maybe—maybe not

Via:  Counterpunch 

The swing to Mitt may represent a desire to hurry up the final all-consuming crisis that will be necessary to precipitate reform in the Fourth Turning.  Certainly Obama has shown himself to be a pathetic creature.  Romney is merely simple-minded and barbaric, captive to the wealthy.  Romney has something of a touching tragic dimension as well:  the most moving moment in the last debate was when he spoke with almost teary-eyed pride of his best accomplishments in Massachusetts, upping the quality of the schools and providing health care to almost everyone in a plan he now disowns.  Our government is badly broken. 

The problem with thinking that by letting things get really bad under Mitt that things will get better quicker because people will “take to the streets” quicker is that Mitt may usher in a new Dark Age of neo-feudalism in which repression will be absolute.  The state has put all the tools in place for this to happen.  Norman Pollack is probably living comfortably on a generous pension and would like to watch the battle from a hillside somewhere.  Not sure I can buy into his argument, but I do feel the disgust with Obama and the pull to “try something different.” 

Under the Cloak of Liberalism

America on the Cusp of Fascism

by NORMAN POLLACK

I use “fascism” here not as a cliché, but as an historical-structural formation principally rooted in the mature stage of capitalism, in which business-government interpenetration (what the Japanese political scientist Masao Maryuma called the “close-embrace” system) has created hierarchical social classes of wide differences in wealth and power, the militarization of social values and geopolitical strategy, and a faux ideology of classlessness to instill loyalty for the social order among working people.  In fact, each of these factors is already present to a high degree in America–superbly disguised however by the rhetoric of liberalism, as in Mr. Obama’s presidency.

This said, my provocative hypothesis (only slightly tongue-in-cheek) is that in the coming election Romney is preferable to Obama.  Why? In broad terms, we see varying degrees of sophistication in the mad dash across the finish line (i.e., fascism proper, midway between nascent and full-blown), with Romney and Republicans representing plebeian fascism, and Obama and Democrats a sophisticated corporatist form.  Everything charged against Romney may be true, from Social Darwinist beliefs and gut-militarism to cultural intolerance and xenophobia, and perhaps even more so for the party as a whole, though that is a moot point–an overt negation, on all grounds,of what we mean by democracy.  (Not that America has honored or achieved that state of political-economic development through most of its history!)   To pursue the candidacy of Romney involves one in a societal nightmare of unrestrained wealth (and the perks that go with it, from horribly skewed taxation policy to categorical setbacks to unions, wage rates, and an antilabor climate) and severe cuts in the social safety net.  All this is known, predictable, transparent–part of my argument for viewing Romney as preferable to Obama.  Clearly, Trotsky in popularized form is in the back of my mind.

By contrast, Obama is unassailable, enjoying the protective cloak of the state secrets doctrine (which, also as the National Security State, he invokes constantly), the liberal glossing on all policy matters, thanks to the extremely able spinmeisters Axelrod and Rhodes, and an adoring, submissive, uncritical base, in deep denial and for whatever reasons unwilling to examine the administration’s record.  That record confirms the long-term political, economic, and moral bankruptcy of the Democratic party, whose differentiating character setting it apart from the Republicans lies in the magnitude of skilled evasion and/or deception surrounding policies which themselves replicate the central elements in those of their opponents.

Republicans sincerely criticize Obama because they are too ignorant to recognize, in their rush to antigovernment rhetoric, that he takes the same position as they smoothed out to please a base at best composed of pretend-radicalism and, equally, to ward off criticism from those who desperately want to believe his earlier promises.  This comes down to political theater at its cruelest.

The list of actual betrayal is long and virtually covering his public policy without exception.  (A good start can be found in the critical essays inHopeless, a true icebreaker for the uninformed prepared to listen.)  Let me select several obvious examples.  1) Health care, in which Obama savaged the single-payer system, thus preparing the way for the same on the public option, meanwhile silencing, or rather, delegitimating all dissident voices, at the same time as exempting health insurers from antitrust prosecution and favoring Big Pharma; 2) Civil liberties, a good litmus test of democratic governance, in which Obama’s Department of Justice argued against granting habeas corpus rights to detainees, invoked the Espionage Act against whistleblowers, carried surveillance beyond that of previous administrations, with the National Security Agency one of the culprits practicing the black magic of eavesdropping, while renditions and “black holes” continue and even agencies like FDA spy on its employees; 3) militarism, from which foreign policy, including trade policy, cannot be excluded, in which the drone–as Obama’s signature weapon–terrorizes whole populations reeking destruction from the skies, naval power displayed from the South China Sea to the Mediterranean, a whole new generation of nuclear weapons in the pipeline (exempt from potential budgetary sequestration), a military budget itself second to none, and what appears to be a permanent state of war; 4) the omissions, which by their absence speak volumes about the purposes and policies of his administration, in which job creation and foreclosures have not been addressed, climate change, wholly disappeared, gun control, nonexistent, poverty never, never mentioned, and business and banking regulation the compounding of phoniness on phoniness, not unexpected considering Obama’s belief in deregulation and bringing in the Clinton-Rubin crowd of free marketeers.

How much more or worse damage can Romney and the Republicans do? They might fuss about same-sex marriage and contraception, while Obama, in his Pacific-first geopolitical vision and concrete strategy, wants to encircle China, and press for an economic agenda promoting further corporate-wealth concentration.

If Republicans come across as Taliban on cultural issues, Democrats almost surreptitiously advance the financialization of the total economy, with the consequent distortions introduced–loss of manufacturing, increasing wealth concentration, and capitalism’s Achilles heel, underconsumption.  Why Romney?  Because his transparency as a Neanderthal may, just may, bring people into the streets, while under Obama passivity and false consciousness appear almost irreversible.  I for one will stay home.  The lesser-of-two-evils argument is morally obtuse, and dangerous, the first, because it means complicity with policies ultimately destructive, the second, because it induces an undeserved self-righteousness which next time around would yield further compromise.  If the people are gulled and lulled into the acceptance of mock-democracy, courtesy of Goldman Sachs and waterboarding apologist Brennan, with Obama presiding over the bread-and-circuses routine, heaven help us.

The extraction of America

A couple more references on the extraction of America by the 1 percent.  The financial elite have set America up to go broke so they can buy up the assets at steep discounts.  It’s the old pump and dump and buy back in strategy.

The stupidity of the American people in not being able to see through Mitt Romney’s pandering to the 1 percent is evidence that part of the extraction plan was dumbing the American people down virtually to “useless eater” status, perhaps in advance of a “regrettable” liquidation through deprivation of health care and poverty and abuse by perpetually lowered socioeconomic status.  General Petrov sounds the same themes as the Gamble scion in his video a couple of posts ago.  Note that Petrov also is careful to state his conspiracy theory is not about any one religious or ethnic group, i.e., the Jews, and I agree.  The international financial elite are multicultural, united in their greed and enabled in global expropriation by weakened national states the world around.

The Self-Destruction of the 1 Percent Chrystia Freeland, New York Times

A very fine rant

The main service provided by this site, other than my perspective on “animal spirits,” is to filter the large amount of blog reading I do and forward to my readers the best.  Jim Quinn has a great post that is worth a read in its entirety at

EPIC FAIL – PART ONE

Jim makes some great points about the true state of the labor market that even we cognoscenti can lose sight of in the constant barrage of propaganda from the MSM.

Links 3/21

A couple of articles from the rich troves put forth by www.nakedcapitalism.com and www.ritholtz.com that I’d like to comment on.

Via:  Too Smart to Fail by Thomas Frank

Notes on an Age of Folly

The “sound” banker, alas! is not one who sees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows so that no one can really blame him.
    –John Maynard Keynes

In the twelve hapless years of the present millennium, we have looked on as three great bubbles of consensus vanity have inflated and burst, each with consequences more dire than the last.

First there was the “New Economy,” a millennial fever dream predicated on the twin ideas of a people’s stock market and an eternal silicon prosperity; it collapsed eventually under the weight of its own fatuousness.

Second was the war in Iraq, an endeavor whose launch depended for its success on the turpitude of virtually every class of elite in Washington, particularly the tough-minded men of the media; an enterprise that destroyed the country it aimed to save and that helped to bankrupt our nation as well.

And then, Wall Street blew up the global economy. Empowered by bank deregulation and regulatory capture, Wall Street enlisted those tough-minded men of the media again to sell the world on the idea that financial innovations were making the global economy more stable by the minute. Central banks puffed an asset bubble like the world had never seen before, even if every journalist worth his byline was obliged to deny its existence until it was too late. […]

The thesis is basically that the elites stick together, trash the economy for short-term personal profit (that may be long-term in terms of their own financial futures).  You got to walk the walk, and talk the talk.  You couldn’t say the Iraq was was stupid and budget-busting until a quorum of your peers said so.

This resonates with me personally because I have a few friends on the East Coast, where I’m not, who are part of the Establishment, and it always amazes me how unaware they are of being in the bubble.  Of course, to them, with my free-thinking ways, I’m clearly just an ignorant country bumpkin, not suitable for showing off to their friends.

Via:  No-Growth Capitalism’s post-crash manifesto

“It’s about revolution,” warns Sir Richard Branson, founder and chairman of Virgin Group, in his new book “Screw Business as Usual,” a declaration of war against today’s out-of-control capitalism.

Branson’s at war, on the attack. His command center is the Carbon War Room where message becomes action, rallying an army of entrepreneurs into what I see becoming a game-changing New No-Growth Capitalism.

“My message is a simple one: business as usual isn’t working … business as usual is wrecking this planet … Resources are being used up; the air, the sea, the land are all heavily polluted ... The poor are getting poorer … Many are dying of starvation or because they can’t afford a dollar a day for lifesaving medicine.”

Sounds like a profile of Ike, Patton and MacArthur, generals who successfully waged a near-impossible war. The world needs more like them to wage this war, “turn capitalism upside down-to shift our values from an exclusive focus on profit to also caring for people, communities and the planet.”

Yes, capitalism is wrecking the planet … is using up resources … creating poverty, starvation, disease … epidemics, inequality, climate failure … and yes, warfare … remember the Pentagon prediction that by 2020, the planet’s “carrying capacity” will be so drastically compromised that they’re already planning military defense systems for the coming “all-out wars over food, water, and energy supplies.” Yes, by 2020.

Capitalists are short-term thinkers, don’t care for people, planet

The Carbon War Room is the command center for the counteroffensive: But they better act fast. As economist Bill McKibben wrote in Foreign Policy, it “might already be too late.” Former Greenpeace CEO Paul Gilding went further in “The Great Disruption”: “It’s time to stop worrying about climate change … brace for impact.”

Why? Population growth is out of control, headed for 10 billion by 2050, predicts the United Nations. And Jeremy Grantham, whose firm manages $100 billion, warns the planet can’t feed 10 billion. Still, global leaders turn a blind’s eye to the consequences, ignore this hot button issue to our peril.

Yes, Branson’s heard all these warnings. But his optimism is as infectious as his smile. He senses a new global dawn sweeping the world, a “vibrant and definite sea change from the way business was always done, when financial profit was a driving force.”

He hears more and more people openly shouting “screw business as usual.” More accurately: Screw capitalism. It is “time to start caring for people, communities and the planet,” caring for someone other than just their shareholders and their insiders. Now that shift would indeed be a historic game-changer.

How to survive in a world without Perpetual Growth economics?

In planning ahead, we do need Branson’s sea change, a totally new way of thinking and a dramatically new economic system that focuses on three goals for the next generation outlined in our earlier “Save the World” manifesto, goals that parallel Branson’s. Goals that today’s capitalists are certain to fight, just as they’ve been fighting to kill all reform efforts since the 2008 crash.

But after the coming global economic collapse these essential goals will define the New No-Growth Capitalism, if the planet is to survive:

• Does it support the prosperity of all economic classes worldwide?

• Will it help create a sustainable planet for the future generations, in 2050 and beyond?

• Will our leaders encourage stabilization of the world’s population?

Classical economics is fatally flawed, driven by Perpetual Growth mind-set. We will self-destruct unless we “turn capitalism upside down … shift our values.” […]

Now the manifesto makes some common thought errors, like saying that the planet cannot feed the existing population.  The problem is the distribution, gentlemen.  However, at least they are acknowledging that.

What makes this interesting is that it recognizes that we are getting closer by the day to the “stop” event, the next collapse, when the most pressing question will be “Am I my brother’s [and sister’s] keeper?”

These leaders are saying, “Yes, I am,” and urging us to figure out how to equitably take care of our species before we self-destruct…. And I would judge a return to animal barbarism and war as the solution to every problem as a form of self-destruction.

Meltdown

h/t zerohedge.com

Part 1 here.  This Aljazeera documentary is chockerblot with high-profile insiders from the Western financial world.  What does that tell you?

If you haven’t watch Inside Job, watch it now.  It used to be available for free online, but I don’t find it now.

Income growth under Republican and Democrat presidents

The first thing Bartels did was break down economic performance by income class. The unsurprising result is shown in the chart….

Under Democratic presidents, every income class did well but the poorest did best. The bottom 20% had average pretax income growth of 2.63% per year while the top 5% showed pretax income growth of 2.11% per year.

Republicans were polar opposites. Not only was their overall performance worse than Democrats, but it was wildly tilted toward the well off. The bottom 20% saw pretax income growth of only .6% per year while the top 5% enjoyed pretax income growth of 2.09% per year. (What's more, the trendline is pretty clear: if the chart were extended to show the really rich — the top 1% and the top .1% — the Republican growth numbers for them would be higher than the Democratic numbers.)

In other words, Republican presidents produce poor economic performance because they're obsessed with helping the well off. Their focus is on the wealthiest 5%, and the numbers show it. At least 95% of the country does better under Democrats.  (source)

The Republicans are salivating over the opportunity to send America into the twenty-first century as the first developed nation to return to a state of feudalism.

The 2005 Kevin Drum article cited as source above (based on the Bartels paper and subsequent book) goes on to show that Republican presidents tend to produce their best economic performance in the year of the election, to induce lower income groups to vote for them. 

So it would appear the Pyrrhic victory sought by the Republicans—an economic collapse under President Obama to usher in their king—is part of a longer pattern of election year economic manipulations of long standing.

God help us.