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Our economy has increasingly been financialized, and the result is a sluggish economy and stagnant wages. We need to decide whether to stop the cycle and save the economy at large, or to stay in thrall to our banks and bondholders by leaving the debt hangover from 2008 intact. Without a debt writedown the economy will continue to languish in debt deflation, and continue to polarize between creditors and debtors. This debt dynamic is in fact themajor explanation for why the U.S. and European economies are polarizing, not converging.

As a statistical measure, financialization is the degree to which debt accounts for a rising proportion of income or the value of an asset, such as a company or piece of property. The ratio tends to rise until defaults lead to a crisis that wipes out the debt, converts it into equity, or transfers assets from defaulting debtors to creditors.

As an economic process, financialization makes money through debt leverage — taking on debt to pay for things that will increase income or the value of assets — such as taking out a loan for education or a mortgage on a property to open a store. But instead of usingcredit to finance tangible industrial investment that expands production, banks have been lending to those who want to buy property already in place — mainly real estate, stocks and bonds already issued — and to corporate raiders –those who buy companies with high-interest bonds, raising debt/equity ratios. The effect often is to leave a bankrupt shell, or at least enabling the raider to threaten employees that bankruptcy would wipe out their pension funds or Employee Stock Ownership Plans if they do not agree to replace defined benefit pensions with defined contribution schemes that are much more risky.

…click on the above link to read the rest of the article…

The world industrial system as bacteria in a Petri dish

April 21, 2016

The world industrial system as bacteria in a Petri dish

In a previous post, I speculated that a thermodynamic system such our industrial economy is completely dependent from its “outside”. As it grows and incorporates this “outside”, it is obliged to store high entropy inside itself. Possibly, the epidemic diffusion of riots in the very heart of the global system is an indicator of this predicament. Here, I will try to discuss another aspect of the same topic: the fact that, apparently, we are unable to do anything to avoid global collapse despite our deep knowledge of Natural laws and our incredibly powerful technical means.

40 years after the publication of “Limits to Growth”, we discover that we have been just following the trajectory of the “base case scenario” of the book; business as usual, and with a disturbing accuracy level. In fact, in the intentions of the authors, the BAU scenario was not a forecast, but just one scenario among others, useful to analyse how the system works and changes. But the real world itself has turned this scenario among others into an authentic prophecy (image source)

How was this possible?

It could be that we have done nothing to change our policy and economy, but this is hard to believe. In the past 40 years, we have seen a number of major changes and all of them were completely unpredictable at the beginning of the Seventies. For instance, the partial collapse of the Soviet Union, the rise of China to the level of the second planetary power, the globalisation and financialization of the economy, the Internet, the Euro and so on. The Meadows and their staff could not have incorporated all this into their model, simply because they could not imagine anything like that. So we are forced to think that such epochal happenings have been marginal accidents in the evolution of the global socio-economic system.

To get a better understanding of this issue, I think it is best to start by considering World3 itself. In a post of some time ago, Ugo Bardi showed that, behind its complexity, World3 has a very basic thermodynamic architecture. It is a system that builds up and stocks information, with a positive retroaction to the inside flow. The larger the system is, the more it is able to extract low entropy from the wells and throw out entropy to the sinks.

In other words, the BAU scenario more or less describes the activity of bacteria inside a Petri box. First of all, it starts to exploit the very best resources (for instance: sugar) and so it grows. As it grows, it needs more resources and so it starts to digest everything available and, at the same time, it evolves as fast as possible in order to implement its efficiency in the exploitation of increasingly rare and poor resources. This until, at the end, it digests itself and dies.

…click on the above link to read the rest of the article…

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

April 12, 2016

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

This predatory exploitation is only possible if the central bank and state have partnered with financial Elites.

After decades of denial, the mainstream has finally conceded that rising income and wealth inequality is a problem–not just economically, but politically, for as we all know wealth buys political influence/favors, and as we’ll see below, the federal government enables and enforces most of the skims and scams that have made the rich richer and everyone else poorer.

Here’s the problem in graphic form: from 1947 to 1979, the family income of the top 1% actually expanded less that the bottom 99%. Since 1980, the income of the 1% rose 224% while the bottom 80% barely gained any income at all.

Globalization, i.e. offshoring of jobs, is often blamed for this disparity, but as I explained in “Free” Trade, Jobs and Income Inequality, the income of the top 10% broke away from the bottom 90% in the early 1980s, long before China’s emergence as an exporting power.

Indeed, by the time China entered the WTO, the top 10% in the U.S. had already left the bottom 90% in the dust.

The only possible explanation of this is the rise of financialization: financiers and financial corporations (broadly speaking, Wall Street, benefited enormously from neoliberal deregulation of the financial industry, and the conquest of once-low-risk sectors of the economy (such as mortgages) by the storm troopers of finance.

Financiers skim the profits and gains in wealth, and Main Street and the middle / working classes stagnate. Gordon Long and I discuss the ways financialization strip-mines the many to benefit the few in our latest conversation (with charts): Our “Lawnmower” Economy.

…click on the above link to read the rest of the article…

Spain Braces for its Biggest Corporate Insolvency… Ever!

November 27, 2015

Spain Braces for its Biggest Corporate Insolvency… Ever!

Blood on the Bourse

Spain is about to experience its biggest corporate insolvency ever. Unlike Bankia and all of Spain’s other bankrupt savings banks, Abengoa, a Seville-based multinational specialized in renewable energy and “environmental services,” is unlikely to receive a taxpayer-funded bailout – at least not just yet, not with general elections looming in less than a month’s time.

Following yesterday’s announcement that the company was seeking preliminary protection from creditors, Abengoa’s bonds and shares went into freefall. It was a financial bloodbath. According to S&P Capital IQ LCD, its euro-denominated 8.5% notes due 2016 plunged 38.5 points to 25.5 cents on the euro, after having been up at 93 cents on the euro only two weeks ago.

The U.S. dollar-denominated paper also suffered huge price declines in block trades. The engineering “Finance” unit’s 8.875% notes due 2017 plummeted 42.5 points, to 16.5 cents on the dollar, while the pari passu7.75% notes due 2020 plunged from 45 before the announcement to 15 cents on the dollar.

On Spain’s benchmark stock index, the IBEX 35, Abengoa’s B shares – valued just over a year ago at €4 – plunged as much as 69% to €0.28 before staging a brief dead-cat bounce. At the time of writing today, the B shares have fallen a further 25%.

With total debt of nearly $9 billion and growing, Abengoa yesterday filed under article 5 bis of the Spanish insolvency law. As WOLF STREET reported a few months ago, the company was undone by its mad rush for growth at any cost as well as its unconstrained embrace of the dark arts of financialization.

Even if Abengoa was to find a last-minute guardian-angel investor to take up some of the slack, the chances of it being able to find enough cash to service its debt pile are rice-paper thin. The company’s losses, slumping shares, and difficulty accessing financing could generate “significant doubts” over its ability to keep operating, warned its chief auditor, Deloitte.

…click on the above link to read the rest of the article…

Why Slower Money Is the Key to a Real Economic Recovery

November 13, 2015

Why Slower Money Is the Key to a Real Economic Recovery

An exciting crop of organizations are financing businesses in a way that creates real wealth. Here are a few ways to scale them up so that they can truly challenge Wall Street.

There’s a financial fault line that runs through the heart of our economy. Wall Street’s most recent rumblings—which saw the major indices take a dive in response to weak growth in China—are a stark reminder of the danger. If the stocks go tumbling in, so do our businesses, jobs, paychecks, and pensions. The tremors may have subsided for the moment, but if we’re to give the late financial seismologist Charles Kindleberger any credit, the next big one could be right around the corner.

What we really need is a comprehensive rebuild beyond the quake zone.

According to Kindleberger’s classic book Manias, Panics and Crashes, the market sees notable financial quakes or “panics” roughly every seven years or so. The frequency has increased recently, with significant panics occurring in 1989 (Savings and Loan crisis), 1992 (Britain’s Black Wednesday), 1997 (East Asian crisis), 1999 (Tech Bubble), and of course 2007-08. Whether the recent seven-year twitch turns out to be just a minor temblor or a foreshock to something much worse remains to be seen.

But one thing is for certain: If we don’t find a way to shift our increasingly financialized economy to stable ground, the next big crash is inevitable.

The Wall Street formula for disaster is simple: ever-greater money chasing ever-bigger bets with ever -faster payoffs on ever-riskier financial products equals crashes of seismic proportions. Greater, bigger, faster, riskier. It’s like a twisted Daft Punk song.

…click on the above link to read the rest of the article…

Untangling America from the American Empire

October 30, 2015

Untangling America from the American Empire

Those calling for an end of the Empire don’t seem to realize that the federal state’s vast entitlement programs are ultimately funded by the Empire.

The Status Quo would have us believe that America and its Empire are one entity. This is handy for those with Imperial designs but it is false: America could be untangled from its Empire, and many of us believe it is essential that America untangles itself from its Imperial structures and ideologies.

What I call The Imperial Project was cobbled together in the aftermath of World War II, when the Soviet Union and America posed an existential threat to each other’s ideologies and systems. It may be hard to believe, but the U.S. did not have a Central Intelligence Agency (CIA) or other espionage/intelligence gathering agency prior to World War II.

America had no spy agency and no Black Operations/Special Forces capabilities. The National Security State as we know it today did not exist.

Though the Deep State has long been an essential feature of the American power structure, the post-war Deep State extended its reach globally in ways that the pre-war Deep State could not.

I have covered the Deep State for many years:

Surplus Repression and the Self-Defeating Deep State (May 26, 2015)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Dollar and the Deep State (February 24, 2014)

Many people naively think all that’s needed to end the Imperial Project is close America’s overseas military installations and end the endless wars of choice.While the eradication of the neo-conservative Imperial agenda would be a welcome first step, it would only be a first step, as I explained in You Can’t Separate Empire, the State, Financialization and Crony Capitalism.

…click on the above link to read the rest of the article…

All Hail Our New Lord and Master, the Stock Market

October 29, 2015

All Hail Our New Lord and Master, the Stock Market

We’re all minions now of the stock market.

The all-powerful Federal Reserve is mere minion of the stock market, a kitten absurdly claiming in public to be a tiger. If the market threatens to drop, the Fed quickly prostrates itself and does the bidding of its Lord and Master: “No rate hikes, minons!”

By cowering in terror of a stock market tantrum, the Fed has surrendered everything: its vaunted (and completely phony) independence; its duty (yes, go ahead and laugh) to the nation and the real economy–everything.

The Fed is nothing but an abject slave of the market. It masks its servitude with Newspeak, but the reality it has only two choices: burn the market down with a series of rate hikes or surrender completely to the market, relinquishing any pretense of power or control.

The Fed is not alone; the entire financial-political system is now beholden to the stock market.

Want to impose real restrictions on the financial sector? Forget it, Congress–the market will rebel. And if the market sags–you’ll cave in like all the market’s servile minions because a significant chunk of your campaign contributions come from those profiteering off the market.

Corporate America–don’t dare miss your quarterly earnings number or you will suffer the wrath of a market that destroys all who don’t obey its demands for short-term profits at the expense of long-term profitability. Were the management of a public company bold enough to sacrifice short-term profits for long-term growth, they wouldn’t survive the market’s destruction of their stock price.

The stock market now dictates fiscal and monetary policy within the Empire because the American economy has been fully financialized. Profits flow not from innovation in products and services but from the financialization of every income stream.

…click on the above link to read the rest of the article…

Why Is Wealth/Income Inequality Soaring?

October 23, 2015

Why Is Wealth/Income Inequality Soaring?

If conventional labor and finance capital have lost their scarcity value, then the era in which financialization reaped big profits is ending.

Why is wealth/income inequality soaring? The easy answer is of course the infinite greed of Wall Street fat-cats and the politicos they buy/own.

But greed can’t be the only factor, for greed is hardly unknown in the bottom 90% as it is in the top .1%. The only difference between the guy who took out a liar loan to buy a house he couldn’t afford so he could flip it for a fat profit and the mortgage broker who instructed him on how to scam the system and the crooked banker dumping toxic mortgage-backed securities on the Widows and Orphans Fund of Norway is the scale of the scam.

The difference isn’t greed, it’s the ability to avoid the consequences or have the taxpayers eat the losses, i.e. moral hazard. The bottom 90%er with the liar loan mortgage and the flip-this-house strategy eventually suffered the consequences when Housing Bubble 1.0 blew up in spectacular fashion.

Moral hazard describes the difference between decisions made by those with skin in the game, i.e. those who will absorb the losses from their bets that go south, and those who’ve transferred the risks and losses to others.

The too-big-to-fail banks that bought political protection simply shifted the losses to taxpayers. Then the Federal Reserve helpfully paid banks for deposits at the Fed while reducing the amount banks had to pay on depositors’ savings to bear-zero, effectively rewarding the banks with free money for ripping off the taxpayers.

America’s financialized cartel-state system institutionalizes moral hazard. This is one cause of rising inequality, as the super-wealthy are immunized by their purchase of political influence.

The top .1%’s share of the pie has been rising in the era of financialization and institutionalized moral hazard, everyone else’s share has declined:

…click on the above link to read the rest of the article…

Gold – Follow the Yellow Brick Road?

September 12, 2015

Gold – Follow the Yellow Brick Road?

The following is a veritable tour de force by Nicole Foss on the value of gold in a crashing economy, for different people in different circumstances.

Nicole Foss: In light of the rapidly-propagating loss of confidence, and consequent shift to deflation, with falling prices across the board as a result, it is appropriate to review our stance on gold. The yellow metal is often perceived as a panacea – a safe haven guarding against all manner of potential financial disruption. It has long been our stance at the Automatic Earth that this is far too simplistic a position to take. We live in a complex world for which there are no simple one-dimensional solutions. It is important to distinguish between the markets for paper gold and for physical gold, and to understand the risks inherent in gold ownership in order to manage them. As we wrote back in 2009:

Firstly, the goldbugs are right that physical gold is real money (unlike paper gold, which is just another Ponzi scheme). It has held its value for thousands of years and will continue to do so over the long term. However, that does not mean that gold prices cannot fall or that purchasing gold now is the right way for everyone to preserve capital….People’s circumstances are different. Those circumstances determine their freedom of action, both now and in the future.

Bubble Dynamics

It is our view that (paper) gold has been in a bubble which peaked in 2011, along with the rest of the commodity complex. It has been subjected to the same dynamic as other commodities, which have collectively lost touch with their own fundamentals as they have become increasingly over-financialized. Financialization moves the dynamics into the virtual world, while simultaneously subjecting them to perverse incentives. Substantial price movements having at best a tenuous connection with actual supply and demand are the result.

…click on the above link to read the rest of the article…

Let’s Talk About Solutions, Not Fake Fixes

August 9, 2015

Let’s Talk About Solutions, Not Fake Fixes

Since the status quo has no workable Plan B to “growth” in an economy in which household incomes have declined 8.5% in a supposedly expanding economy, real solutions must arise outside the status quo.

It’s a lot easier to talk about what’s wrong with the status quo and fake fixes than it is to talk about real solutions–for a number of reasons.

1. It’s clear to virtually everyone who isn’t being paid to make absurd claims that everything is peachy that the status quo is failing, so discussing the failings is like shooting fish in a barrel.

2. Grousing indignation (at all the failings) is an easy state to sustain; solving problems is an entirely different and not-so-easy state to sustain.

3. Emotional numbness brought on by financial distress and exhaustion reduces interest in solutions–there doesn’t seem to be any when you’re exhausted.

4. The predatory, parasitic status quo generates social fragmentation and an incoherence that breeds disassociation and alienation, neither of which are conducive to discussing solutions.

5. Since the status quo has no workable Plan B to “growth” in an economy in which household incomes have declined 8.5% in a supposedly expanding economy, real solutions must arise outside the status quo, which means the vested interests will lose their stranglehold on wealth and power. This is a no-no, so any solutions that lead to this are marginalized, ridiculed, labeled “impossible,” etc.

6. To solve a problem we must first diagnose the problem correctly. The correct diagnosis of the current pathological status quo is: the problem is not X,Y or Z–the problem is the system itself.

I am indebted to correspondent Tom R. for extracting what might be the core diagnosis of our ills from my discussion with Max and Stacy: “We’ve been brainwashed into financializing the human experience.” (at the 9:20 mark)

…click on the above link to read the rest of the article…

Financial Shenanigans Should Have Trained Me For This

July 18, 2015

Financial Shenanigans Should Have Trained Me For This

So there I was, caught in a bramble of sharp blackberry thorns coming from every direction. I’d been snagged first by the swooping thorn from high up that caught my hair, then by two more barbed branches that grabbed my pants and arm as I tried to retreat. Having left the house in an overconfident manner, thinking it was like any other day, I had no urgency to remember my phone, a sidearm or my small pruning shears to cut my way out. Cog was at work and there was no one for miles to hear me scream should the black bear come by for a late blackberry lunch.

Obviously I survived to tell the tale, but not without several important lessons learned which I would like to share with you all today.

Just as people save and invest for their retirement down the road, we seek to store our picked berries by jamming or freezing them for the winter months ahead. Like the banks and government agencies, there are many middle level workers whose job it is to tend to the ecosystem of blackberry growth who never intend to harm another. They are simply doing their job. The spider who resides in the berry patch and eats the smaller bugs which would decimate the berries was just doing what he does when he bit me.

In life it is not the sole fault of bank tellers or courthouse clerks that the systems of banking and government morphed into something we don’t want. Sure, these employees help hold up the system by working where they do, but no more than we ourselves support the beast with banking business to transact and payment of local tax and municipal bills. Like the aggressive bugs in the berry thickets, we ultimately all want to get through the performance of our respective roles there and fulfill our goals.

…click on the above link to read the rest of the article…

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

May 29, 2015

U.S. Households Under Pressure: Stagnant Incomes, Rising Basic Expenses

How do you support a consumer economy with stagnant incomes for the bottom 90%, rising basic expenses and crashing employment for males ages 25-54? Answer: you don’t.

Frequent contributor B.C. passed along a sobering set of charts that provide context for How The Average U.S. Consumer Spends Their Paycheck. The basic story is well-known to the bottom 90%: most of the household income goes to taxes, housing, food and transportation, with healthcare and insurance, pensions and retirement contributions rounding out the big-ticket items. (Higher education is, as we all know, paid with student loans by all but the top-tier of families.)

Here’s the question this raises: is the sliver that’s left enough to support a $17 trillion consumer economy? The answer is obvious: no.

Stagnant household income has a number of systemic causes, including the generational decline of full-time employment (A Rising Share of Young Adults Live in Their Parents’ Home) and the concentration of wage gains in the top 10%. These dynamics are not easily addressed, for the simple yet profound reason that the amount of human labor that generates a meaningful profit in a stagnant, over-indebted, financialized economy is declining.

The only way most enterprises can sustainably earn a profit is to offload costly human labor (with its immense burdens of healthcare, pensions, workers compensation, disability insurance, etc., and the heavy regulatory burdens of workplace rules) and replace it with networked software and smart machines.

The types of human labor that generate hefty profits are increasingly scarce, and as a result entry-level pay and employment are both capped by the high costs of human labor (even at minimum wage) and the relatively meager profits generated by conventional labor.

…click on the above link to read the rest of the article…

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