Wednesday, July 19, 2017

The Death Spiral of Financialization

Each new policy destroys another level of prudent fiscal/financial discipline.
The primary driver of our economy--financialization--is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.
Financial "wealth" created by leveraging more debt on a base of real-world collateral that doesn't actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.
As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.
The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.
These extremes don't just pile up like bricks--they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.
This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.
Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to FinancializationEach "fix" that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy's credit-business cycle.
Each new policy destroys another level of prudent fiscal/financial discipline.
The discipline of sound money? Gone.
The discipline of limited leverage? Gone.
The discipline of prudent lending? Gone.
The discipline of mark-to-market discovery of the price of collateral? Gone.
The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.
The discipline of open-market interest rates? Gone.
The discipline of losses being absorbed by those who generated the loans? Gone.
And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation's seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.



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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Royce M. ($100), for yet another outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
Thank you, Gary A. ($50), for yet another fantastically generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Tuesday, July 18, 2017

The Over-Quantification of Life

The idea that all endeavors can be distilled down to statistics has put us in the Over-Quantification Box.
Correspondent Chad D. recently submitted a thought-provoking commentary on the Over-Quantification of Life:
"I think you could constructively explore the over-QUANTIFICATION of the US. Or we could call it the Wal-Martization of the US. The only that that counts is a number (i.e. price, sales, clients, patients, tickets, arrests, convictions, fines, sex partners, scores, averages, etc.).
What is missing is quality. I think you've mentioned something similar before talking about junk products with a short lifespan, but this way of doing things pervades our society.
I would argue that in nearly every area of society, quantity rather than quality rules the day. In the Criminal Justice system, officers and their immediate supervisors are evaluated based on how many tickets/arrests are made and/or how many complaints are answered. Prosecutors are judged by how many defendants go to jail. Judges are judged by how many cases they clear and how many cases are on their docket. Prisons want more prisoners. Legislators are rated on how many laws they passed. I remember Ron Paul was castigated for not passing many if any laws while in office.
I could go on with banking, investing, medicine, education, sports, farming, etc. Quality has been left in the dust by the system. The quality that remains is due to the good people who are still in the system. I don't know what really drives this phenomena, but I would say that usury is part of it. Usury demands that the system go ever faster to 'produce' more and more to feed its ever hungry stomach.
But there must be something more to it than that. Ideas/thoughts?"
Thank you, Chad, for an insightful introduction to a profound topic we all experience in daily life.
Let's start with Chad's reference to usury, i.e. interest on debt. When we borrow money, the interest we pay over the term of the loan can add up to far more than the sum borrowed, depending on the rate of interest and the duration of the loan.
Over time, indebtedness and the interest due on all the debt diminishes the net income remaining to pay for everything other than interest, and the household/ state / economy is hollowed out.
This is one reason for the biblical notion of debt jubilees, in which all debts are periodically forgiven to remove the drag of debt on debtors and the economy at large.
The only way to sustain expanding debt is 1) inflation, which enables borrowers to pay interest with "cheaper" money and 2) expanding income.
Let's say I owe $10,000, and my annual wage is $30,000. With modest but sustained inflation, my wage eventually doubles (assuming it keeps up with inflation) while my debt remains $10,000 minus whatever principal I've paid.
Alternatively, if inflation is near-zero but my wage rises by 10% a year, eventually my wage will double to $60,000, while my debt remains $10,000 minus whatever principal I've paid.
I think Chad is describing something rather subtle but very real: expanding debts require an equivalent expansion of income, i.e. productivity, to provide debtors with enough income to service the rising debt loads and have enough left to pay the rest of their obligations and to fund the consumption the economy depends on for growth.
This is a driver of demand for increased productivity that is rarely if ever recognized. This demand for increased productivity then drives the over-quantification of the processes and outcomes of every sector and endeavor.
If we think back to the early days of industrialization, a key tool to identify bottlenecks in production and improve productivity was breaking down the entire process into discrete steps that could be measured and quantified.
Quality control was also quantified, which enabled the gradual improvement not just of production but of the quality of the output. This is the foundation of the Deming Prize for Development of Quality Control/Management in Japan, which recognizes contributions to Total Quality Management (TQM).
The prize honors Dr. W. Edwards Deming, who taught that "by adopting appropriate principles of management, organizations can increase quality and simultaneously improve productivity."
It was all too natural, if fundamentally false, to reckon that these same statistical tools of quantification could be profitably applied to every field, from education to criminal justice to healthcare.
While certain aspects of these endeavors might benefit from being measured, counted and quantified, the idea that all endeavors can be distilled down to statistics has put us in the Over-Quantification Box Chad described: by relying solely on quantification, we've lost a truly useful sense of quality and outcome.
There are multiple problems with quantification. I often mention the key flaw: we only recognize what we measure. If it isn't measured, it simply ceases to exist in a quantified world.
Another flaw: many activities and endeavors cannot be distilled down to statistics. We can go through the motions of counting something or other, but this process misses the essence of the endeavor or process.
We're also tempted to invoke flawed methods of measure. Take the system many colleges now use in which students are invited to rate (quantify) their professors.
Any such survey method is self-selecting, i.e. the students who choose to rate their professors are self-selected. So if the 20% who dislike a teacher complete the survey while the 60% who liked the teacher do not, the teacher's rating will be harmfully inaccurate.
Students are not unbiased observers. Those who received poor grades might seek a form of payback by giving the offending professor low marks.
There are even subtler flaws in what we measure and how we measure. In a previous Musings Report, I discussed the World War II-era damage reports on aircraft returning from bombing missions over Nazi Germany. The idea was to study the damage inflicted by fighters and flak with an eye on strengthening the aircraft's weak points.
Mathematician Abraham Wald hit on a profound flaw in the methodology: the really important damage reports could not be filed, because it was the bombers which had been shot down that held the vital clues to the aircraft's weaknesses. The aircraft that had been shot down could not be studied, so they effectively ceased to exist. This fatally distorted the results of the statistical analysis.
Here is a link that describes the study: Survivorship Bias
The goal of improving productivity is laudable, but justice (and many other aspects of human society) cannot be reduced to counting convictions. This dependence on quantification creates perverse incentives to game the system and push up the numbers to evoke a success that is phantom.
The infamous "body counts" of the Vietnam War come to mind, as do prosecutors' heavy reliance on plea bargaining to up their conviction count.
Students are now slavishly instructed to serve one goal: to improve their scores on tests that like the WWII bomber study, ignore what cannot be measured easily, yet is actually vital.
Quantification is easier than actually studying complex problems and situations, and it can generate an illusion of knowledge and insight. This is the danger of over-quantification and Big Data, that is, the over-reliance on over-quantification to make assessments and judgments about endeavors in which the key dynamics and meanings cannot be captured or illuminated by quantification alone.
This essay was drawn from Musings Report 27. The Musings Reports are emailed weekly to major contributors ($50 or more annually), subscribers and patrons ($5 or more monthly).


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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Justin S. ($5/month), for your wondrously generous subscription to this site -- I am greatly honored by your support and readership.
Thank you, Larry T. ($150), for yet another outrageously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Read more...

Monday, July 17, 2017

Why 2017 Is Like 1969

1969-2017: and here we are again, in so many ways.
A deeply polarizing new president, a disastrously misguided official narrative that the political Establishment doggedly supports despite a damning lack of evidence, and an economy teetering on the edge of recession--and worse.
Sound familiar? Welcome to 1969 redux. The similarities between the crises unfolding in 1969 and the present-day crises are not just skin-deep--they're systemic.
Consider the basic parallels.
1. Nixon was if anything more polarizing than Trump. If there was any politician Democrats loved to hate, it was Nixon. Yet Nixon won a close race against an Establishment Democrat, at least partly because he ran as a "peace candidate" and because he spoke to the Silent Majority who disagreed with the nation's direction. The Silent Majority was mocked and ridiculed by the mainstream media as racist, close-minded deplorables.
2. The Democratic Party had become the Establishment bastion of war-mongering. The Democratic White House had been obscuring its devastating strategic and tactical miscalculations behind a slick PR campaign and a pervasive and often illegal program of suppressing dissenters and whistleblowers.
3. At the behest of the Establishment, an immense propaganda machinery had been running full-tilt to paper over foreign-policy failures and tragedies (including but not limited to the Vietnam War). In 2017, this immense propaganda machine is focused on discrediting the Trump presidency by unearthing or fabricating evidence of collusion with our default Bad Guy, Russia.
4. The political Establishment had decided to tamp down discontent with the Vietnam War by borrowing vast sums to pay for both "guns" (the war) and "butter" (the Great Society social welfare programs). Paying for the war and a military capable of fighting one-and-a-half other wars (at that time, the Pentagon was geared to fight 2.5 wars) would have required some sacrifice in domestic spending, and that would have further inflamed popular resistance to the Vietnam War. The expedient (and predictably disastrous) choice was to ramp up deficit spending so no domestic sacrifice was needed to pay the crushingly high costs of the Vietnam conflict. In 2017, U.S. public debt basically doubled during the Obama/congressional guns and butter borrowing spree from $10 trillion to $20 trillion.
5. The U.S. economy had by most measures topped out in 1966 or 1967, and by 1969 the veneer of permanently rising prosperity was shredding. The first wave of globalization washed ashore as our enemies and allies in World War II had built powerful export economies that had the advantage of cheap currencies via a vis the U.S. dollar.
6. China was a potentially destabilizing force that threatened U.S. hegemony in the Pacific. In 1969, China was deep in the chaotic throes of the Cultural Revolution which decimated its educated and leadership classes and destroyed much of its physical cultural heritage. In 2017, China's monumental economic growth is losing steam even as its designs to establish hegemony in the South China Sea increasingly threaten its Asian neighbors' security.
7. The Cold War with the U.S.S.R. was heating up in numerous places around the world, including the Mideast and Southeast Asia.
8. Beneath the relative stability of the Cold War geopolitical stand-off, the global economy and social order was changing in profound ways. Technological advances were poised to fatally disrupt many established and supposedly permanent centers of power. Trade and capital flows were shifting in ways that undermined the Bretton Woods currency order, and social/cultural revolutions were spreading around the globe like wildfire.
9. The mainstream media parroted the official narratives and "facts" until the counter-evidence was too overwhelming to ignore.
And here we are again, in so many ways. A deeply polarized nation, angry over rising expectations that no longer match economic realities, an Establishment that doubles down on failed policies and narratives rather than admit catastrophic errors of judgment, a political order that pursues public relations and "signaling" over substance, a political/ financial Elite that chooses political and economic expediency, kicking the can down the road rather than tackle thorny problems head-on, a stagnating economy that is poised on the precipice of profound technological and social disruption, and a global order that is fraying and coming apart at the seams.
The decade following 1969 was one of multiple global disruptions in the political, social, energy, geopolitical, currency and economic spheres. The difference now is that the buffers that existed in 1969 are now paper-thin, and so the potential downside of disruption and instability is much, much greater.
Our Financial Buffers Are Thinning


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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Nicolas B. ($60), for your outstandingly generous contribution to this site -- I am greatly honored by your steadfast support and readership.
Thank you, Daniel E. ($5), for yet another marvelously generous contribution to this site -- I am greatly honored by your steadfast support and readership.

Read more...

Sunday, July 16, 2017

Earth's Economy Glorifies Waste, Exploitation, Debt, Expediency and Magical Thinking

Humanity appears to default to magical thinking when faced with untenable situations that demand systemic change.
How would extraterrestrial anthropologists characterize Earth's dominant socio-economic system? It's not difficult to imagine their dismaying report:
"Earth's economy glorifies waste. Its economists rejoice when a product is disposed as waste and replaced with a new product. This waste is perversely labeled 'growth.'
Aimless wandering that consumes fossil fuels is likewise rejoiced as 'growth.'
The stripping of the planet's oceans for a few favored species of edible fish is also considered 'growth' as the process of destroying the ocean ecosystem generates sales of the desired seafood.
Even more perversely, the resulting shortages are also causes of rejoicing by the planet's elites, as their ability to purchase the now-scarce resources boosts their social status and grandiose sense of self-worth.
This glorification of waste is the same dynamic that destroyed the civilization on Zork.
Earth's economy also glorifies exploitation, as this maximizes profits, which appears to be the planetary equivalent of a secular religion that everyone believes as a Natural Law.
Thus slavery and monopoly are highly valued as the most reliable sources of profits. If ethical concerns limit the actual ownership of humans, Earth's economy incentivizes feudal arrangements that share characteristics of servitude and bondage. In the current era, the favored mechanisms are over-indebtedness (debt-serfdom) and taxation by the state, which extracts approximately 40% of all labor via threat of imprisonment.
Earth's elites exhibit a pathological preference for micro-managing the commoners via criminalizing much of everyday life and imposing extremely harsh punishments for any dissent or resistance to elite domination.
This is the same dynamic that doomed planetary civilizations in the Blug system.
Earth's economy is currently dependent on depleting fossil fuels and borrowing from the future to fund consumption in the present, i.e. debt. Rather than face the reality that this is not sustainable and pursue other arrangements, Earth's elites have chosen expediency, responding to the inevitable crises caused by depletion and dependence on debt with expedient but ultimately destructive policies that paper over the crises but at the cost of generating greater crises in the next iteration.
Humanity appears to default to magical thinking when faced with untenable situations that demand systemic change. This is eerily parallel to the now-lost civilization of Frum.
It seems Earth's dominant species has selected the most destructive policies and mindsets to glorify and worship. Earth's current civilization is doomed, with near-zero prospects for the necessary transition to a more sustainable, less exploitive arrangement.
Earth's decline is a tragi-comedy, much like the one on Ononon that entertained our home planet audiences for a time."
In case you missed it, here's a snapshot of total debt as a percentage of median household income: from 79% to 584%. If this strikes you as "healthy growth" because "debt doesn't matter"-- welcome to the Wonderland of Magical Thinking.



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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Terrance J. ($50), for your outstandingly generous contribution to this site -- I am greatly honored by your steadfast support and readership.
Thank you, Ed C. ($50), for your monstrously generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Thursday, July 13, 2017

We Do These Things Because They're Easy: Our All-Consuming Dependence on Debt

A world in which "we do these things because they're easy" has one end-state: collapse.
On September 12, 1962, President John F. Kennedy gave a famous speech announcing the national goal of going to the moon by the end of the decade. (JFK's speech on going to the moon.) In a memorable line, Kennedy said we would pursue the many elements of the space program "not because they are easy, but because they are hard."
Our national philosophy now is "we do these things because they're easy"-- and relying on debt to pay today's expenses is at the top of the list. What's easier than tapping a line of credit to buy whatever you want or need? Nothing's easier than borrowing money, especially at super-low rates of interest.
We are now totally, completely dependent on expanding debt for the maintenance of our society and economy. Every sector of the economy--households, businesses and government--all borrow vast sums just to maintain the status quo for another year.
Compare buying a new car with easy, low-interest credit and saving up to buy the car with cash. How easy is it to borrow $23,000 for a new $24,000 car? You go to the dealership, announce all you have to put down is a trade-in vehicle worth $1,000. The salesperson puts a mirror under your nose to make sure you're alive, makes sure you haven't just declared bankruptcy to stiff previous lenders, and if you pass those two tests, you qualify for a 1% rate auto loan. You sign some papers and drive off in your new car. Easy-peasy!
Scrimping and saving to pay for the new car with cash is hard. You have to save $1,000 each and every month for two years to save up the $24,000, and the only way to do that is make some extra income by working longer hours, and sacrificing numerous pleasures--being a shopaholic, going out to eat frequently, $5 coffee drinks, jetting somewhere for a long weekend, etc.
The sacrifice and discipline required are hard. What's the pay-off in avoiding debt? Not much--after all, the new auto loan payment is modest. If we take a 5-year or 7-year loan, it's even less. By borrowing $23,000, we get to keep all our fun treats and spending pleasures, and we get the new car, too.
At the corporate level, it's the same story: borrow a billion dollars and use it to buy back shares. Increasing the value of the corporation's shares by increasing profit margins and actual value is hard; boosting the share price with borrowed money is easy.
It's also the same story with politicians and the government: cutting anything is politically painful, so let's just float a bond, i.e. borrow money to pay for what was once paid out of tax revenues: maintaining parks, repaving streets, funding pensions, etc.
This dependence on expanding debt for maintaining the status quo is a global trend. Debt is exploding in China in every sector, and the same is true in other nations, developed and developing alike.
Borrowing more money from the future is easy, painless and requires no trade-offs, sacrifices or accountability--until the debt-addicted economy collapses under its own weight of debt service and insolvency. People keep repeating various versions of the story that "debt doesn't matter" because "future growth" will outgrow the skyrocketing debt, or inflation will make it all manageable, or that central banks will do whatever it takes to make sure everyone has enough money to service their debt burdens: negative interest rates, helicopter money, etc. etc. etc.
We want to believe in financial magic because we want things to remain easy.Borrowing from the future is easy, making sacrifices and being accountable is hard.
But eventually the cost of servicing even low interest-rate debt squeezes spending, eventually capital tires of chasing negative interest-rate bonds, eventually lenders realize that leverage has skyrocketed along with the debt and risk is piled up like dry tinder in a drought-weakened forest.
Central banks realize they can't even limit the expansion of their balance sheets without triggering a panic that would collapse all the debt-based contraptions and manipulated markets they've held aloft with limitless liquidity.
If you believe that going from a total debt burden (government and personal debt) per household being 79% of median household income to debt per household being 584% of median household income doesn't matter and will have no consequences, you believe in magic. Unfortunately, thinking something will be easy forever and have no consequences is not the same as the real world of skyrocketing debt and leverage having no consequences.
A world in which "we do these things because they're easy" has one end-state: collapse. Believing that debt has no consequence, that the status quo is permanent, that all the promises based on soaring debt can be paid--it's all an appealing fantasy, magical thinking at its most enchanting. Believe these fantasies at your own risk.


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.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Lyn G. ($50), for your outstandingly generous contribution to this site -- I am greatly honored by your support and readership.
Thank you, Carolyne D. ($50), for your monstrously generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP