Jeffrey Sachs unplugged

If you didn't catch this on Mish, it is must-see. Link is below. In case you had any doubt about the rot pervading Washington and Wall Steet.

http://www.youtube.com/watch?feature=player_embedded&v=7VOWnnEphjI

 

Financial fascism leads to collapse

I posted this over at macrofuge.com:

In story form: when financial capital (ownership of “physical capital” aka the means of production) becomes too concentrated, a “failure of effective demand” occurs as the owners of the means of production lower wages to the point where consumption spending begins to fail; this depresses “animal spirits” quite rationally because most [true] investment demand is a derived demand (from consumer demand); hence the preference among those owning the means of production in the form of financial capital to prefer rents and speculation (with their cash) over investment in “physical” capital; through influence the rentiers lower capital requirements and create an inherently unstable monetary structure, within which they fight like pirhanas over speculative opportunities, which leads to a cycle of intermediary collapses, extreme monetary base creation, and bailouts using sovereign powers of taxation to pass the loss along to the people; once trust on the monetary unit vanishes, perhaps with an expropriation of deposit funds, the stage is set for (1) deflationary collapse, as bank runs overwhelm the deposit insurance system, and (2) hyperinflation, as the monetary authorities order banks to issue prepaid debit cards to anyone wanting to withdraw his or her money from the bank to “restore confidence.”  They then go and spend it as fast as they can.

The structural reforms needed: no more (or much higher reserve level) fractional reserve banking; steeply progressive income and, for a time, wealth taxation to restore a healthy circulation of income and product. See Emanuel Saez’s recent interview on this at http://www.bostonreview.net/BR38.1/emmanuel_saez_david_grusky_income_inequality_taxes_rent_seeking.php

Marx has the last laugh.

Personal note:  the bank has cut my position, and I am seeking new opportunities.  While I was happy to support small business lending, which is what I did, it was hard for me to reconcile working in such a manifestly corrupt industry as banking with my personal values.  The Fed and the big banks are sucking the life blood out of the economy.  As has recently become public knowledge, the big banks’ “profits” are manufactured out of their influence (being “too big to fail”).  Still, small businesses need loans (sometimes), and I felt good about supporting that, although I would encourage anyone thinking of starting a small business to avoid debt if at all possible. 

We are living through a period of history when the Devil has much of the world by the throat.  One can only hope and pray that it ends better this time than it did in 1940.  It will take a miracle of collective willpower.

Fascism in America?

My family was friends with Peter Drucker’s family when I was growing up.  I recently got back in touch with Drucker’s daughter, about my age.  Peter and Doris Drucker escaped from Austria in 1937 for America.  They were concerned about the Nazis.  Both Druckers were of Jewish extraction.

Peter died years ago, but Doris, a brilliant woman, lives on in Southern California, now 102.  I asked my friend if her mother saw any similarities between what is happening in America now and what she saw in the 1930s in Europe.

“My mother is paranoid,” my friend said.  “She’s says we need to keep cash on hand to bribe the guards at the Canadian border.”

Go read Jim Quinn’s last few posts at www.TheBurningPlatform.com— “No hesitation targets” and “Wall Street titans screw you every day”.

Economy at stall speed

Source:  FRED.  Data to 2012Q4.  The blue line is the value of the most recent observation.  Almost every other time this value has been seen the economy has been either going into recession imminently, or within a year or so.  Only in the 21st century has the economy managed to avoid recession by bouncing off the blue line.

The green line is linear trend over the period from 1950.  The red line is the trend over the past 30 years, which suggests that the US economy is headed for a state of secular stagnation and possible collapse.  

‘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

Effective fiscal policy

I’m going to keep this short and sweet.

It ain’t tax cuts.  Federal revenue as a percent of GDP is already way below long term averages, and it was already probably too low--we have a decaying infrastructure to show for it.

It ain’t “stimulus spending.”  The Princeton Clowns, Krugman and Bernanke (and remember, Princeton historically has sent more of their graduates to Wall Street than any other school in the country) with some fact-checking by the Berkeley Inequality Guru, Emmanuel Saez, have shown the rest of us that stimulus spending, like all other income types, goes mostly to the top 1 percent.  Saez showed that in 2010, a year when the stimulus package was active, 93 percent of the increase in income went to the top 1 percent.

I can picture Krugman and Bernanke as two nerds playing with the rubber nipples of a blow-up woman doll, one nipple labeled “fiscal policy” and the other labeled “monetary policy.”  Heads up their asses, fully captive to the status quo.

So what works?  Income redistribution.  You take money, whether borrowed or taxed, and give it to the people on the bottom.  They will spend every penny of it, and it have a multiplied effect on many other incomes.  While they may buy goods made in China by American corporations sold at Walmart, they are likely to spend a lot of it on goods made right here at home.

The Benign Brodwicz program has always been poverty level workfare for those that need work, and honest banking.  If the honest bankers in the world would think for a second, they might realize that it was playing extend and pretend to recapitalize after the Latin American debt collapse in the 1980s that started the country on its own debt run-up.

Sheila Bair gets it. 

File under kleptocracy, banana republic, fascism, theft

Where is the greener grass?

Assume that capital is mobile internationally, and it will seek the highest net rate of return. It is evident that consumption has been overweighted in the composition of American aggregate demand, because it was debt-funded. Increasing income and wealth inequality lower the average propensity to consume. Disposable income is being reduced by tax increases. Investment demand is largely derived from the demand for final goods, for which capital goods are used in production. With stable or decreasing final consumption demand, investment demand is largely put on hold. In this essentially deflationary situation, slack appears in labor and industrial markets. Capital sits on the sidelines, waiting to see what happens next, where the greener pastures may lie. Central bankers lower interest rates to the zero bound and sit around wishing and hoping for an inflation to get the debt under control. Sovereign governments, beholden to the banks, refuse to use the issuance of sovereign currency to put slack assets back to work. This is where we find ourselves.

The conventional wisdom, as given on personal finance websites and in corporate boardrooms, is to wait for the turn of the developing economies, and to put the money where the growth is. America is unattractive.

There is much damage being done to the world economy while playing this waiting game. One by one, developed economies are being sent into severe depression, for example, Portugal, Greece, Spain. These poor countries had unfortunately given away the right to manage their own currencies and were crushed by German creditors. The Japanese, under no such constraints, are gearing up to devalue their currency in an aggressive, mercantilist strategy. Can Brazil, Russia, and India be far behind? China is attempting to balance their domestic demand, and we wish them well. The United States has pushed its interest rates to zero but is frustrated by the status of its currency as the "risk-free" asset. The US has shown that it can blow asset bubbles but because it is intent on the continuing crucifixion of its labor class, it cannot get a sustained domestic inflation going. Pity the poor greenback.

The hidden shoals of the international financial system, the derivatives exposures so conveniently not on the banks' balance sheets, guarantee that the chances of international collapse of the deflationary type are still significant. At that point, should it arrive, some new form of money will almost certainly need to be created. The Fed buying up all Treasury issuance will not be enough.