Last week, I discussed the possibility that we had reached a depressed equilibrium, resulting in long-term or even permanent employment stagnation. I also discussed the possibility that the only routes out were large-scale technology shocks, geopolitical shocks or very large scale fiscal stimulus — events that drastically change broader market expectations.
Frustratingly, there are some superficial signs of recovery. Yet digging beneath the surface it is apparent that we are dealing with a depression in employment demand. These graphs produced by a blogger under the pseudonym Eugen von Böhm-Bawerk from Bureau of Labor Statistics data illustrate this well.
Since the recession, lots of part-time jobs have been created. Yet full-time jobs remain in much shorter supply:
This has meant that the percentage of the population with a full time-job is just where it was after the recession:
There has been significant growth in low-pay jobs, but decline in high-pay jobs, again illustrating a weakening of labour demand:
The extent to which this is fixable and may fix itself is unclear. In the long run, the sea may be flat and the weather may be sunny. But what this trend has already led to is strong growth for corporate incomes, and a decline in labour incomes. If in the long run this trend does not reverse we will face a bifurcation of society between the capital-owning elites still thriving on rents, automated industry and foreign wage labour, and a squeezed middle deprived of the well-paying jobs and careers that once supported and grew the middle class and increasingly dependent on part-time jobs, temporary work and welfare. Without middle class job and labour growth, demand in the economy as a whole may remain depressed.
azizonomics 
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Reblogged this on The Left Turn.
Every “economic miracle” since the 20th century began (with the obvious exceptions of the tiny city-states of Singapore and Hong Kong) has had prorectionism as its foundation. Protect domestic producers. Protect domestic markets. Protect domestic workforce. Secondly, every economic miracle since the middle of the 20th century has been delivered by exporting goods and services to the United States.
If America just applied the first part of the economic miracle formula to itself, it would create the greatest economic boom for America in its entire history. A universal, Uniform, and Punitive system of tariffs would reverse the flow of money and employment back toward the United States. America doesn’t need to export to other countries in order to pull off this reversal.
The potential for inefficiencies in pricing and distribution during the transition to an America-centered economic policy is obvious. But the gains in private sector (Tax-paying, not tax-funded) employment would be tremendous, if we persevere through the transition.
Perhaps, but the problem could possibly be just as easily solved by establishing a new global monetary order. With the American dollar still being the reserve currency of choice, we will always have to deal with a Triffin dilemma where we can run large trade deficits without it making our currency any weaker. Thus, even if we pass tariffs, it may not do much except hurt US consumers, Japan’s protectionist policies have not done much to curb their deflation over the past 20 years (until Abenomics of course).
If we could have another Bretton Woods type event and agreed to things like a global reserve currency (perhaps we could try to have it backed by a carbon tax and kill too birds with one stone, though that may just be over-optimistic) then we could be able to boost our private industries simply because we aren’t having a currency which is being propped up by Eurodollars and foreign transactions, which artificially raises our wages in comparison to other countries. So instead of trying to attack the problem with tariffs which are well proven to be problematic in other areas, we could really attack it at its source, and allow countries to use their currencies and exchange rates as a way to essentially do the work of a tariff, though perhaps in a more manageable and market friendly manner.
My guess is that we will see major Global monetary reform in the next 15-20 years due to sovereign debt concerns and perhaps the greater macro trends like the one described in this post. Hopefully it will be something that addresses some of the dysfunctions of our system and the harm that occurs to countries who have to deal with a Triffin dilemma from having a reserve currency.
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P = In < Pr The act of Production results in total individual Incomes being less than total Prices.
Confront that scarcity of total individual incomes by supplementing them in a fashion that does not immediately increase costs….and you'll have the relative economic stability that is the Holy Grail of economic theory.
3D Printing, Solar or Fusion Power, Manna from Heaven = Reduced costs for given production.
The reality is large scale farming, pesticides and fertiliser has ruined soil biodiversity. Microbes have been killed so micro nutrient uptake is reduced. Empty calories so to speak.
People don’t practice REAL family planning unless faced with an existential crisis. War or massive famine usually hit first.
There is no way to stop the insatiable demand of the third world. They have acces to computers, and TV, so they will want what the First World has.
When will they be roused to rally and march on Rome?
That may well be their want, but that is in no way an argument for keeping the present unworkable and enslaving system. Humans react more rationally when their basic needs are provided for. I will take my chances on a world based on those needs provided by a system whose actual psychology is confidence, hope, love and a strong sense of Grace rather than one that is actually based on insecurity, hopelessness, mere exchange and scarcity of purchasing power….as is the present one.
Hey BFWR, have you read the article I wrote about Julian Simon a while back? http://thehobbesian.wordpress.com/2013/05/20/julian-simon-and-the-welfare-state-are-libertarians-social-malthusians/ I basically was bringing up some of the issues you guys are talking about, the arguments from the Malthusians that we are limited by the laws of physics and that we simply can’t have a good quality of life for everyone on this planet versus the arguments of cornucopians like Julian Simon and Karl Marx who seem to believe that if human capital is adequately utilized, innovation and creativity can solve many of our problems just as past ecological problems have been dealt with through new technologies and innovation.
While I still think we need to take the environment into consideration, and we shouldn’t have population exploding into infinity, I ended up taking the position that the cornucopian arguments have some merit to them, and that in fact it could be used to justify things like the welfare state or a social credit/dividend. Basically that the arguments that things like universal healthcare are going to make us all die waiting in line are probably not true, and that there is real value in giving everyone an opportunity to utilize their human capital to the fullest extent. And when you think about it, it is kind of hypocritical that many of the people who argue that we don’t need to worry about things like global warming or running out of fossil fuels because human ingenuity and the market can deal with it, are also the same ones who argue that the increase in demand caused by things like a social credit would make us all die in a Malthusian catastrophe.
Very interesting post.
@ Aziz, thanks. Julian Simon is one of those theorists who when you first hear what he is saying, you think “my god, this man must’ve been mad”, but once you actually hear him out, you realize that he does have an important point to make, which is that human capital and human ingenuity are incredibly powerful things which have solved numerous problems in the past and can solve numerous problems in the future. Though Julian Simon seemed to think that free market capitalism was the best way to channel this, I think that there are other measures that could be taken to boost the utility of human capital even more. Julian Simon would probably be rolling in his grave if he knew that I was using his arguments to justify things wealth redistribution. But he would probably agree that the way the “ultimate resource” works is that once an insight is discovered or an idea is created, it belongs to humanity and future individuals will use it in ways that the creators may have never been able to imagine.
And so while things like 3D printers may cause unemployment and problems in our current system, they also create a real opportunity to maximize the utility of human capital. And we shouldn’t let incredulity cause us to develop Malthusian cynicism, because if we use our “ultimate resource” correctly we can achieve tremendous progress, and so far the past 300 years have shown us that human ingenuity has been able to find a way to break through many problems which seemed like dead ends to past generations.
I am not sure why it is difficult to understand why good paying jobs have been as scarce as they have been over the past fifty years in the U.S.
If you wish to have working people in the U.S. compete with the rest of the world [ROW], then this will drive labor costs down. If you wish to pursue a policy where maximum economic efficiency is the end-all and be-all, then again, you will drive down labor costs.
The interesting thing is that while at the same time all of these labor saving strategies have been introduced by the corporations, management [which has pulled this off this economic coup], has rewarded themselves with grandiose salaries and bonuses, having convinced the public that their compensation should be proportional to the destruction they have wrought on the middle class [i.e., corporate profits].
And, of course, their masters are more than willing to pay them a fine commission for doing such noble work.
This is what groups do when their power becomes excessive. Look at every institution in the U.S., as no matter whether you examine health care, education, housing, the military, whatever, they are all designed to strip all things financial from the population.
You have few good jobs because people in positions of power are getting paid for destroying jobs and transferring the wealth to the elite, with the blessings of all of the co-dependent institutions that profit accordingly.
Do you hear anybody [in a position of power/influence] out there complaining? Corporate CEO’s, University presidents, religious leaders, political hacks, professional associations?
I don’t.
Agreed. But in their defence, you have to be a Sociopathic Genius to be able to digest and co-ordinate all those Management meetings. Not many around so the MARKET drives compensation programmes.
P = In < Pr
Start from the beginning, confront what actually is and deal with it in a way that actually resolves the problem not just palliate it, no matter whether it forces one to think differently and risk the scorn of the erudite, the orthodox and the unfortunately less aware.
Well, it appears as if you are saying that because the economy is what it is, you should print money and give some to everybody and this will fix the problem.
Sounds like a great idea.
You perceive me correctly. And it IS an excellent idea…delusions of inevitable inflationary scenarios to the contrary…as I explained to Roman P on the prior thread and I re-post here now: Read it and my post prior to it for context and a complete understanding
Forget about the capitalist, he does a pretty good job of making a profit today even with a scarcity of individual incomes because he begins with adequate financing (as in the example I gave of $100k to start up the enterprise) and is allowed to expense his costs with depreciation etc. The individual not only is shortchanged in his pay he is taxed and is also not credited with the capital appreciation that he has helped to build. This is not worker ownership or control of enterprise as in socialist or communist ideology…it is merely correcting a flaw in the cost accounting system….so that individuals can liquidate prices, the capitalist can (more easily) make a profit….and the entire system and the individuals in it…..can be free in fact….instead of only in theory.
As for where is the money going to come from, it (the dividend and the discount) will come from an agency mandated to distribute them interest free ONLY TO INDIVIDUALS based solely on consumption and production statistics ex nihilo just like a central bank does today. And private banks will lend just as they do today, that will not be a problem so long as they follow good banking practice. Inflation? Nope, nope, nope. In the first place there is an inadequacy of individual incomes and when you provide enough income to the individual….the individual will have much less problems paying his bills and any loans he might want to take out, and eventually there will probably be much less need or desire by him to borrow at all. The government will need to inject less money into the economy as a result also. No inflation, not monetary inflation as I just pointed out and no price inflation because of Social Credit’s discount mechanism.
I am still digesting your concept. On the inflation question, provided production meets demand, there will never be inflation. Due to industrial scale manufacturing, mining and distribution techniques, production has so far kept up with demand, and can explain low inflation and even deflation in non food and energy items.
Weimar Germany had hyperinflation because output was stalled (Strikes) and money flowed into idle labourers hands (International Loans given to Government to pay a Dole)
Yes, money systems are complex and economic orthodoxies are ingrained.
If the program I envision were to be made policy you would probably have to watch financiers and wealthy speculators like a hawk and be ready to legally kick their asses. Weimar occurred only because the central banker lent money to such who then shorted the currency and initiated the hyperinflationary cycle. That can and could be avoided, but you’ll have to make it clear to the sociopathic types in banking and speculating….that a no tolerance policy with “extreme prejuidice ” was in effect.
Even a consistent and liberating plan has ways of being fucked up. You just can’t let that stop you. A corollary on the saying: Do not let the perfect be the enemy of the Good applies: You have to be smarter than the assholes who enjoy doing damage for self interest or even just for its own sake.
“Forget about the capitalist, he does a pretty good job of making a profit today even with a scarcity of individual incomes because he begins with adequate financing (as in the example I gave of $100k to start up the enterprise) and is allowed to expense his costs with depreciation etc.”
It’s hard to know where to start because it appears as you are assuming that this system works as the formulas suggests it does.
You speak of “the capitalist” as if all capitalists are the same and you can simply plug in some value ‘c’ in one of your formulas.
Profit derived has to do with all kinds of factors, some economic, some political, and some unknown. As this system has become increasing complex and loaded down with taxes, fees, interest, and all the rest, profitably often becomes very obscure.
“The individual not only is shortchanged in his pay he is taxed and is also not credited with the capital appreciation that he has helped to build. This is not worker ownership or control of enterprise as in socialist or communist ideology…it is merely correcting a flaw in the cost accounting system….so that individuals can liquidate prices, the capitalist can (more easily) make a profit….and the entire system and the individuals in it…..can be free in fact….instead of only in theory.”
Systems are designed by the few in the interests of the few. It has never been any other way, nor will it likely be any other way, because what motivates people is their natural self interest.
The “flaw” as you couch it, is THE SYSTEM.
“As for where is the money going to come from, it (the dividend and the discount) will come from an agency mandated to distribute them interest free ONLY TO INDIVIDUALS based solely on consumption and production statistics ex nihilo just like a central bank does today.”
Groups only work well when they are doing for themselves, otherwise, they are a bunch of buffoons [generally speaking].
“The government will need to inject less money into the economy as a result also. No inflation, not monetary inflation as I just pointed out and no price inflation because of Social Credit’s discount mechanism.”
Even a government of two people is a complete disaster. Do you really believe that something like this could work? People could care less about anybody else, as this is the natural order of things. Given freedom, people will do what they can, but when the screws are turned [institutions gain control], everything goes to hell quickly.
The only thing that can work for the majority of people is getting back the most simple [in all things]. This economic system is at maximum complexity because it is at maximum fraud and theft.
Human nature will never support an idea such as social credit. People in groups are there because they wish to serve their own interests.
True compassion can only be manifest by the individual, and here lies the only hope for man.
As I said cynicism is not valid critique. and philosophical apathy will never, EVER get anything done…except the continuance of the status quo.
“True compassion can only be manifest by the individual, and here lies the only hope for man.”
Policy is the acting of systems. All that is needed is for policy to actually be aligned with the “thinking” that is the philosophy of the system…..and so will that philosophy be policy reality.
I am a philosophical anarchist. I could tell you all about what I believe but this does not matter. Nobody gives a rat’s ass what I believe, and the same holds true for what you believe.
What’s important is not individual belief systems, but instead, human nature. Attaching your wagon the the idea of social credit goes against the way human nature operates, especially in groups.
So, you can say that I am cynical, but I will tell you that I try to see things as clearly as I can, interject my own beliefs sparingly [and only for amusement].
Systems are what they are and have not appreciable changed since the beginning of social man. How can it be any other way?
The psychology and policies of the system make a difference. That’s all that matters. Everything else is opinion.
“The psychology and policies of the system make a difference. That’s all that matters. Everything else is opinion.”
Systems don’t have psychology, individuals have psychology. Just the same, psychology is total bullshit.
Systems don’t have policies, people make policies. It appears as if you are attempting to humanize systems, a dis-ease you have no doubt contracted from Madison Avenue who [for decades] has been attempting convince the world that corporations, “really care about you.”
My friend, we can go round and round and round and get nowhere because the human mind is incapable of accessing reality. I can prove or dis-prove anything because the intellectual world is defined by cause and effect. Once you understand this process, then you can see how all things knowable come and go.
There are many systems that people have come up with that are better than the system we currently enjoy, but none of these systems are viable. Only what is happening in this very moment is real, and it is as good as it can be [in this moment].
Should conditions change, then another system might be viable, but it will be because of an infinite number of variables preceding. All things which we can know are subject to birth, life, and death. This happens outside of our ability to understand.
Now, you may call this mystical of whatever words you feel comfortable with, but the truth of the matter is that what is taking place is taking place because this is what human nature interacting with this planet brings us.
Either you can accept it, or you tell everybody that social credit is the new religion to which we should all genuflect. I will tell you what people have told people for thousands of years, and that is that credit/debt is as evil as human behavior gets. Simple look at what is taking place in the world today, what suffering usury hath wrought upon this species.
Economics is the relationship between a single producer and a single consumer and anything beyond this form allows fraud and all the rest to manifest.
It’s mysticism alright. I enjoy mysticism actually, but I like the hopeful and practical aspects of it.
Mysticism exists outside of the intellectual, and therefore, “hopeful and practical,” do not exist.
Just the same, I enjoyed the conversation.
🙂 Okay. As I think I’ve expressed before we’re both on the same bar magnet…just on opposite ends of it. And I like to think that I’m actually viewing things from above it while willing to look at and experience nearly everything that is a part of it. and having a 20 year old son, I tend to be grounded in terms of practicality and hope.
My four daughters trumps your son. 🙂
Hope and practicality and all the rest have nothing to do with Reality. The economic situation we face in this country is due to the infinite number of events preceding.
On a personal level, though, everybody must [attempt to] manifest their true nature, so if it is hope and practicality for you, then I wish you hope and practicality coming out your ears!
“Weimar Germany had hyperinflation because output was stalled (Strikes) and money flowed into idle labourers hands (International Loans given to Government to pay a Dole)”
Not necessarily, historically the Weimar Hyperinflation is linked to the repayment of Versaille debts. They had to pay back debts in gold backed currency (because they didn’t want Germany to just print payments). However Germany just printed money and then bought a boatload of US currency to pay off the debts. And it was really this purchasing of currency that set it off because the exchange rates radically started spinning out of control only making it more worthless. And actually at the height of hyperinflation, there were more Deutsch marks in America than their were in Germany (because of currency purchasing). And usually hyperinflation only happens in those kinds of scenarios where a government owes debts in foreign currency. I am not aware of it occurring endogenously from governments printing it to solely be used domestically to boost people’s incomes and such.
Yes, there was an underlying political and economic context to the hyperinflation, but the actual central banker collaboration had to occur in order for it all to take place. Same thing happened this time around. Did the central Bank not create the funds for Banks to create the housing bubble? Or the bail outs afterward? Of course they did. And eventually it will all comer back to bite…..the middle class…unless we wake up and realize that there is an absolute need to BOTH GIVE more money AND to lend a lot less. Again, this is anathema to the Banker, who basically owns and controls everything. But it doesn’t change the fact that economists and politicians must get de-hypnotized from the loan ONLY paradigm that the Bankers now insist is ultimate reality.
“But it doesn’t change the fact that economists and politicians must get de-hypnotized from the loan ONLY paradigm that the Bankers now insist is ultimate reality.”
Yes, and I think that the historical evidence shows that most instances of hyperinflation were essentially planned out, and usually done because of sovereign debt loads which were imposed on that country (like in Weimar Germany with Versailles, or Zimbabwe with bonds which unfairly increased in price when the US dollar disinflated in the 80s). Its not just money printing that causes it, its really the exchange rates that cause hyperinflation, and usually that can only occur when a country is printing money to purchase large amounts of foreign currency, which can dramatically alter the exchange rate and trigger such a scenario, whereby the only way to keep the economy from spinning out of control is to keep printing money until you inevitably have to create a new currency.
But as for the loan only paradigm, that is very much true. And I think that the point you are making which I agree with is that when people think of wealth redistribution or something like a social credit, they automatically assume that it has to come from taxation of the capitalist economy which can bring with it the problems of over taxation. However, in reality you can actually question why we have to do that in the first place, the fractional reserve economy creates new currency from the loan only paradigm, why not just lessen the burden or creating new capital off the banking sector and allow some of the funding of things like a social credit to come from new money creation? Let that which is unto the capitalist be unto the capitalist and that which unto the socialist be unto the socialist. We could actually lower the tax burden on the economy and at the same time lower the burden on the capitalist finance system to provide the funding for activities, which while vital, are never actually going to be profitable (making the business/credit cycle all but inevitable). If it is prudently done, we shouldn’t expect to see an unreasonable amount of inflation. And even if we do see a higher rate of inflation, the benefits from relieving the banking sector of having to fund all human economic activity may be enough to justify it.
Yes, at the bottom of the current crisis is a struggle for survival of the current consumer financial paradigm of loan ONLY. Finance will make the current crisis such an utterly slow, slow motion train wreck that most individuals and virtually all economists will not notice…..that they’re just being kept in chains so that Finance can continue to rule us. At any moment, if a significant number of the populace realized their slavery we’d have a “falling of the Iron Curtain” phenomenon. This could have happened in the 1920’s when Douglas first wrote his book Social Credit as easily as now. In fact it is often forgotten that the Social Credit movement was a world wide one before WW II. We must not let such happen again….because in an era of modern weaponry…no one’s productive potential is safe.
SMD, emergent qualities etc. etc. are just parts of the orthodox theoretical edifice which blinds economists and thwarts the equivalent of economic flight which is imminently possible if the economic Bernoulli’s principle is (re)discovered. Before Bernoulli flight was “impossible”, “unthinkable,” “laughable”, “absurd”. You just have to look in the right place, the cost accounting data of every business not in bankruptcy, and recognize that the monetary relationships there are a perpetually ongoing reality….that is resolved only by directly supplementing INDIVIDUAL incomes and regularly (monthly) discounting prices to everyone….and voila!, the holy grail of economics, equilibrium is a practical reality….and every economist has egg on his face.
P = In < Pr That's the current perpetual reality. Solve the inequality on the right hand side of the equation in the only way that doesn't immediately re-initiate the reality expressed….and you've got the Bernoulli principle of economics.
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More GIVING less lending…that IS the answer. And cynicism is not valid critique, nor are both philosophical and policy apathy….options.
The division of Eloi and Morlocks has begun.
http://en.wikipedia.org/wiki/The_Time_Machine
The tradeoff is between depression and stagflation. Remember that AD=I+dD/dt, which means that NGDP increasing at a rate of 4% with dD/dt=4% of GDP means real debt levels stay equal. This also means that NGDP increasing at a rate of 5% with dD/dt=6% would actually give a higher employment level even though real debt levels decrease. This means the tradeoff is between higher employment and higher inflation. In either situation, real purchasing power will fall.
If you get NGDP growing at a rate of 10%, unemployment would drop drastically; however, inflation is a problem. The best thing to do in a situation with no private sector credit demand and underwater balance sheets where people are repairing balance sheets is that the income must be provided to pay off the debts–money must be printed. We need to set a NGDP rate above the rate of interest to systematically wipe out the debts. It’s that simple.
The right combination of stimulus, austerity, money printing, and debt reduction will make the corrections with a relatively small amount of pain. If the corrections aren’t well managed, shit hits the fan. Either unemployment shoots up or you get stuck in a situation where the nominal interest rate is higher than NGDP growth so the debts can’t be paid. Every now and then, you see public sectors go completely bust on their balance sheet.
Most of the unemployed post GFC, will most likely never be reemployed. Business has trimmed “dead wood” and won’t be needing it anymore (Productivity improvements) We’ll Get GDP growth, but unemployment won’t respond. It is not like the old times where labour was needed. Now we have machines/robots.
“The right combination of stimulus, austerity, money printing, and debt reduction will make the corrections with a relatively small amount of pain”
We are talking about Democratic Governments coordinating all this?
Yes, and there will be any number of economists and pudits which will point to this as “progress”, “green chutes” etc. Only thing is they’ve forgotten that it’s because the individual has been abstracted out of the equation. It’s too stupid, but all too prevalent.
Suvy – You said: “…the income must be provided to pay off the debts – money must be printed.” Then: “…to systematically wipe out the debts.” Then: “The right combination of stimulus, austerity, money printing, and debt reduction will make the corrections with a relatively small amount of pain.”
Hey Suvy, you don’t want too much, do you? Like impermanence keeps saying, the “group” wishes to serve their own interests. Fair enough, but I’m sure the “group” would want to be fair to all of the people who didn’t play around and get into debt, wouldn’t they? Or is it just your group?
We’re all in this paper Ponzi party, all of us. When you print, you devalue the money I and others have worked very hard for. You’re asking us to wipe out the debt of someone who had no money down, who got in over their heads (sometimes through naivety and sometimes through greed). How about the old way, bankruptcy? Bankruptcy wipes out debt. A few days ago, someone on here said:
“…if someone overextended themselves with debts he goes bankrupt and the lender takes the loss. This process also destroys debt, the natural way.”
Now, how would this crisis have played out in nature? I’m guessing there would have been a different outcome.
I personally don’t need stimulus, don’t need my debts wiped out or reduced, don’t need money printing. You want to inflate away peoples’ debts, people who acted irresponsibly; in other words, help them, but throw me to the wolves?
I don’t think so.
I am with you. I was taught to save for the “desires” I want. Not buy with credit. Saving gives you perspective and prevents impulse purchases. Why should my savings go backward after inflation?
Buddy – yes, inflation is theft. impermanence talks about usury being the stealing of future labor value; it is. But inflation is the stealing of past labor value.
Instead of allowing people who risked and lost to go bankrupt, they are bailing THEM out, and the way they are trying to bail them out is by turning up inflation, which steals from the ones who didn’t play the game.
This would never ever occur in the natural world, ever. It’s all government and Fed manipulation in order to save the banks. Had the banks been okay, the homeowners would have been left to twist in the wind.
Aziz recommends buying gold in order to protect yourself from inflation in a fiat world. But why should people who DIDN’T risk be required to buy gold to protect themselves when the people who DID risk could just as easily declare bankruptcy.
Bull! When you bite off more than you can chew, you go bankrupt.
Actually, my recommendation of tangible assets is more based on lack of counterparty risk than inflation protection. There have been many periods in history when the purchasing power of gold has fallen, sometimes dramatically. But if we’re worried about fiat-denominated inflation (I’m not — I see a lot more deflation), yes, tangible assets are as reasonable a protection as any.
The point you’re missing is that sitting on currency is risky. Inflation and devaluation are always risks, no matter what media you’re holding. Inflation is the risk you take on through the gamble you’ve made in choosing to sit on currency. You can talk all you like of the “natural world”, but we live in the real world and we need to have an understanding of risk that accounts for real world risks.
As for bailouts in the “natural world”, of course there were bailouts before the Fed. In those days we called such things firesales and restructuring but they were bailouts nonetheless, just by private interests (e.g. J.P. Morgan).
People only bite off more they can chew when they think that they can chew it. And the reality is that every downturn in history happens because people are taken by surprise in the depreciation of their assets. I know Aziz advocates tangible assets, but tangible assets decrease in price during downturns in the market. In fact deflation of tangible assets is the driving force of many of our most severe bubbles.
Even if you have tangible assets, its value is dependent upon what someone else is willing to pay for it. If I asked you how much you are worth you would probably start by calculating your bank accounts, then your car, house, possessions, etc. But the fact of the matter is, that in real terms, the only money you have is probably the raw currency in your pocket. Everything else is either a legal right to money (bank accounts, bonds) or the fair market value of an asset. If the fair market value of an asset declines, then you become “worth less” in the sense that you paid money for something that is now less valuable. Money only facilitates trade. Most of the economy and most wealth is simply assets people have a legal right to.
If you wait long enough, almost all investments are worth it, they go up over time, inflation is really our friend in that sense. However, during deflationary times, money becomes more scarce for people to get, they need money to survive, and so sometimes they sell their assets in an economy wide fire sale of sorts, and that is really how the market downturn works. That’s really what makes money important, its not just a subjective value economy, money is something objective and if you don’t have it you can’t procure the means of survival nearly as easily. The people who still have money buy up all the assets from those who don’t, and wealth redistributes upward in the form of assets (both tangible and legal fictions). Its really just simple supply and demand on a broad context.
That’s why the safest kind of assets probably aren’t mere tangible ones, but productive assets which yield income. Its the lack of income which causes people to engage in the fire sale. If you have income, you can weather the storms and not have to lose your assets (because the depreciation is usually going to be temporary, they will go up in value eventually). Gold is only smart during downturns because it tends to rise in price during downturns while other assets depreciate. And besides, I’m not sure buying gold is worth it at this price, its in bear territory and will probably give us better buying opportunities down the road. But at the end of the day, as long as we don’t descend into chaos, productive assets are probably the safest way to go. And if we do descend into chaos, your portfolio is probably going to be the least of your concerns. That being said, I think the most prudent way is to have a diverse portfolio of productive assets, tangible assets and things like stocks, bonds, and yes, a little cash on hand, as well as investing in yourself so your labor can command higher income.
“If in the long run this trend does not reverse we will face a bifurcation of society between the capital-owning elites still thriving on rents, automated industry and foreign wage labour, and a squeezed middle deprived of the well-paying jobs and careers that once supported and grew the middle class and increasingly dependent on part-time jobs, temporary work and welfare. ”
And that is what breaks my heart when I see middle class people who don’t have their finances together, or have somehow been deluded into staying out of the stock market because they think its rigged or people like Peter Schiff gave them horrible financial advice. Having worked in divorce law, I’ve seen household finances in an intimate way that many people, even accountants don’t often see. And I have seen the damage of what 2008 did for investors. The fact is that defined contribution plans like the 401k were designed to make people independent, so that large private pensions and government programs could be relieved of the burden. But most households simply don’t have enough money in their 401k for them to reasonably make it through retirement. The 2008 crisis hit households in their two biggest assets: real estate and retirement portfolio. Both of which have had their value knocked down substantially, thankfully most of the 401ks I’ve seen have at least made it back to where they were in 2008.
But if we are to see a world described in this blog post, ownership of capital may be the means of survival for most people. The problem is that you have to deal with the pensioner’s dilemma, which I define as wanting to preserve your principle by allowing it to grow with things like stocks, while at the same time wanting it to be stable enough to provide you with regular income, which means that you don’t want too much exposure to the ups and downs of the stock market either. The only way to really over come that dilemma that I have thought of is to simply save up as much money as you can, so that you can have a large portion of your savings in a long term stock growth plan, but also have enough bonds, pensions/social security and cash on hand to carry you through a few years if an economic downturn occurs. If you balance it correctly (especially with some good dividend stocks) you should be alright. But the problem is that most middle class households don’t have nearly enough saved up to pull that off. I would guess that you would need at least 1.5 million, if not more to be able to pull off preservation of the principle (or at least not letting it dissipate too quickly) while also having enough income and cash on hand to survive. Capital begets capital, once you have a certain amount, if you are smart you can make it grow many times larger, however, if you are below a certain amount, you may never have the ability to see it grow, because your real life needs and costs mean that you have to keep enough cash on hand to use it, which means that you never get the chance to grow it. Needless to say I am in my late 20s and I try to use stocks as my main vehicle for growth, I understand that it may mean a few nailbiters over the years with the market going up and down, but the evidence shows that saving early, and using stocks will leave you with more when you finally reach retirement. Because I’m scared shitless of the future and I certainly would rather be at the top of that capital wave rather than at the bottom. That being said, what I would really like to see is our government make some fundamental changes so that we don’t end up with such a lopsided economy.
In an age of ever increasing technological innovation the dividend is the logical supplement and eventual replacement to the wage. There will be no putting the genii of either profit or technology back in the bottle. Finance will simply have to evolve toward the inclusion of a monetary concept of Grace, the free gift….or there will be many Bankers, politicians and economists who’ll get their asses shot off. Is this populism? Yes, but it is also Wisdom.
Atty. Hobbes, nice post. As a man in his late twenties, I would imagine that you are looking at the way things are and asking yourself, “How can this system be designed so that the average Joe has a chance to live a reasonably comfortable life while meeting his financial responsibilities.”
The most important thing any of us can do is maximizing our awareness, that is, seeing things as clearly as is possible [what is actually going on]. This way, one can make the best decisions possible, whether it is the best possible advice for your clients, the best investments to suits your financial goals, or, most importantly, how one might go about helping other people.
Unfortunately, each one of us is up against a flotilla of interests spreading dis-information. This begins as we first become aware and continues throughout our lives.
As we grow-up, we begin to understand that the way the world is presented to us [as younger people], is not exactly the way it is. Many rebel in their teens as we begin to realize the magnitude of the lying/deception that goes on everywhere. Many simply can not understand how the adult world buys into all this non-sense.
Then we are confronted with the choice [in our twenties] of whether we wish to participate in the system or work outside of it. And this theme becomes a great burden for almost all adults as the angel on one shoulder, and the devil on the other compete for our attention. The intellectual world, after all, is defined by this duality.
So, just as our parents/tv tell us about Santa Claus, the Tooth Fairy, Superman, and all the rest of the characters that create much of our world outlook, The System, too, is busy at work, creating the socio-economic-political world that governs our very existence.
As the groups which came to control the above agenda evolved into highly powerful political and economic institutions, they began to understand the importance of controlling the, “conversation,” as a method of controlling the agenda.
This process has now matured to the point where the conversation is about anything but the real issues, and people are subject to every kind of distraction.
When you look at the history of social man, you find that what He says and what He does has always been two different things. Becoming an adult is learning how to live with this discrepancy, and it is referred to by all kind of names, mostly, “well, it’s just the way it is.”
Although we can not really understand the incredible complexity of why things are the way they are, we can certainly understand that people are driven by a natural self-interest [to survive]. In turn, individuals use the power of the group to enrich themselves, something that is perfectly natural [but not necessarily good] in their survival quest.
If you look at group behavior, you will see this time and time again. No matter the group, and no matter it’s initial intentions, eventually, and sooner than later, it corrupts. All of them.
So, it is the main job of these institutions to tell you that this is not the case, and one the great coups of Madison Avenue was exactly that, being able to humanize corporations. For myself, I am sicken every time I hear the Kaiser Permanente woman [with the very caring motherly voice] come on the airwaves to tell you how much this @$!&% health care insurance company loves you!!
So, to make a way too long story shorter, the financial and economic system has been set up by the few for their own benefit. There is no way it can serve the interests of the majority. Capitalism in all its various forms is designed to reproduce capital, and does this quite well in its purer forms, but, when you add human nature to this system, it ends up being what it is, essentially the same as all systems preceding.
The only stocks I ever made long term real gains on were the monopolisitc dividend payers. Basically you are getting a return by the company screwing everybody else on price.
These are the Capital Owners that will survive the 21st Century. Each recession see the big players canabalising the cash flow weak players. Governments pay lip service to competition and anti trust laws, but generally they are toothless tigers.
But the best return I have ever made was sheep. Easily 50% compound returns (Offspring). Admittedly the land was free (You have to know how to get land for free) but that is how the Australian Squatters made their fortune.
“These are the Capital Owners that will survive the 21st Century. Each recession see the big players canabalising the cash flow weak players. Governments pay lip service to competition and anti trust laws, but generally they are toothless tigers.”
Wealth and money are always being created more quickly than they are being destroyed, there is more wealth and money on this planet today than there was 100 years ago. The question is then, when you have a recession where assets deflate and money becomes scarce, where is it going? It is not all just disappearing, the money used to fuel things like the housing crisis had to have gone somewhere. Was it the banks? Possibly, but generally banks will collapse in a debt deflation scenario, the banks cannibalize each other. Is it the corporations? Possibly, but they lose capital and suffer asset devaluation as well. Where is it? It appears that the money and wealth usually end up right where it started, with the rich. That is why we have the most wealth concentrated in the top 1% since the great depression, in recessions money is redistributed back up to the wealthy.
That is how capitalism works, during the boom times wealth trickles down from the upper classes and gives the middle and lower classes enough time to create more value, which the rich then sell to them. Then the business cycle takes a turn, and those assets devalue, the poor and middle class are in dire straights again, and the money flows back up. The success of supply side economics depends on where you stop telling the story. If you stop telling the story during a boom, trickle down theory works, however if you wait till a recession occurs you will see it trickle right back up. And of course if you look at it in the long run view it always seems to stay up there in the top. 80 years down the road and we have seen great wealth and progress, yet the wealth has flowed right back up hill.
The people who label Keynes as some kind of statist who wants to upset the “natural order of things” are wrong. He saw what was happening and knew that if it was left up to the “natural order of things” wealth would just flow right back up hill and wouldn’t come back down until the rich were drowning in wealth and the diminishing marginal utility of capital had played itself out. Business cycles are what keeps wealth ultimately concentrated at the top, and they keep the social order structured so that the rich stay rich and everyone else’s piece of the pie stays the same. The libertarian mythology tries to say that just because a government has teeth somehow makes it aristocratic because technically the government is at the top of the food pyramid. And because of that they try to label people like Keynes who want government to intervene as shills for the system. But if you look at the actual economic effects that going on, it becomes clear that the real system is the one which relies on business cycles to maintain a long term status quo. And if you tried to fight the business cycle you are actually challenging that system. The reality is that economic ideologies which seek to boost employment and income for the middle and lower classes are the ones which scare the shit out of the top 1%, and so they try to scare them with tales of government might. Because they knew that if people realized what the real gameplan was people would use the government as the great equalizer, and so capital would flow in a way which actually maximizes income equality and creates a society that is not sharply divided.
“Wealth and money are always being created more quickly than they are being destroyed, there is more wealth and money on this planet today than there was 100 years ago.”
This is NOT true. Much of the “wealth” is simply debt [which is not wealth at all], or, even worse, counterfeiting.
This is, THE GRAND ILLUSION, which will eventually go up in smoke [one way or another], as what will be left is real wealth [that which has been produced through human labor].
This is one of the great all-time cons in human history.
See earlier posts where I agree with many of your points, namely a 0.001% Wealth tax to redistribute the capital into the economy and middle class.
If you understand Trust Law, most of the wealth is held in Trusts. You won’t see wealthy family individual names on Company Share registers.
My best advice to you is to understand Sociopathic behaviour. When you meet these people you can deal with them.
Sociopaths are in every institution of power. Usually at the top. The opposites are called Hermits.
BR, it’s always interesting to observe the hero worship heaped upon these sociopaths, particularly people like Steve Jobs, Bill Gates, Warren Buffet, and the like in the U,S,, people who believe that it is completely acceptable to accept billions for themselves, simply because they can.
Haha as someone who works in law I know a thing or two about sociopaths. I think some of the problem is that we have an economic system which values sociopathy if it somehow benefits capital accumulation. We can see a major shift in the 1960s in the Corporate world with people like Milton Friedman saying that we CEOs should only care about maximizing shareholder value. Friedman argued that corporations were just legal fictions and thus were just investors trying to get a return, and that’s how they should be viewed. He preached this message to the business schools of the day and people like then MBA student Mitt Romney were taught to see things this way, unleashing a new wave of sociopathic profit seeking onto markets around the world.
The irony here is that many of these people like Friedman come from the mainline economic tradition, and they criticize Keynesians and other Macro schools for “taking the human out of the equation”. This kind of logic led them to reject viewing corporations as communities and instead as just people, but by people they meant shareholders. And what makes this ironic is that they completely discount all the other humans involved in corporatism, the workers, the consumers, the business and hence social relationships that form out of it. Instead the CEO should be concerned about maximizing shareholder profits, and shareholders only concerned about having a CEO who maximizes profits. The people who wanted to make economics more about humanity ended up advocating views which were horribly dehumanizing. In that front the Europeans have done much better than us with their social markets and have always kept a strong tradition of viewing corporations as communities rather than just assets.
Excellent points. People lose jobs due to offshoring, share prices go up. Pension plans breath a sigh of relief.
Corporations are simply this era’s Trojan horses. As their power and wealth has accumulated, and their praxis became increasing complex, the sociopaths, who will do literally everything to get something for nothing, jumped at this opportunity to exploit people as never before.
And to their credit, they have done an incredible job of legally stealing from a great percentage of the world’s population.
Hopefully, what will come out of this era are lesson learned about the necessity of severely attenuating the power of any group, be it the elementary school PTA or the largest multi-national corporations.
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I just announced that I will donate to charity, my salary as a Member of Parliament if I win the next Australian Federal election in the Seat of Corangamite.
The Charity I choose will have to have very low administration overheads and most going to those who need it. I can’t stand fat cat Charity CEO’s drawing huge salaries.
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