Work for Yourself, or Work for Others - Good Bye Retirement

Here Stockman has it right again, but he is missing one thing, first read:

Needless to say, even as the main street economy of work and production has been going nowhere, the financial system has erupted skyward. During the last 35 years according to the Fed’s flow-of-funds calculations, the sum of credit market debt outstanding plus the market value of equities has soared from $6 trillion to $95 trillion or by 15X. By contrast, since 1981 the nominal GDP has risen by only 5X.This is “financialization” in its full brobdingnagian glory.  A financial sphere which had occupied 212% of GDP in 1981 now weighs in at 537%.  And, no, the starting figure does not represent some temporarily aberrant low bequeathed by the hapless Jimmy Carter; the 1981 ratio was actually the historic norm. During the halcyon times of 1955, for instance, the sum of credit market debt and equity market value actually posted slightly lower at 197% of GDP.

Now...  in 1981 almost all credit was still privately extended, almost nothing was through banks.

So is the just a reflection of the shift from private to industrial banking?

It may be, but then all that private was once interest-free, and it is all now at very high interest rates, a tax on the economy by banks, who get to privatize the gains and socialize the losses, by law.

That in itself is no small thing.  but here is the challenge:

Stated in constant 2015 dollars, real GDP was $7.2 trillion in 1981, meaning that it has grown by about 2.5X over the last three and one-half decades to $17.7 trillion at present. All the rest of the 15X gain in financial market value since then is not reflective of capitalism, or human greed or even “deregulation” at work. This is the baleful handiwork of a rogue central bank.

Think in terms of what our gdp can throw off in payments.  Next look at the claims on those payments:

No, the entire financial system is infected by the endemic carry trades which result from falsification of the money market by the Fed. There are hundreds of trillion of futures, options and OTC “bespoke” contracts outstanding, for example, but they are inherently and systematically mispriced owing to the pegging of money market rates at zero percent for the last 7 years and at a fixed, below-market rate for the past 30 years. The economic evil is as much in the pegging as in the zero bound level because it is the powerhouse peg of the fed that reduces the risk of carrying financial assets with cheap short-term borrowings.

Too many people think those payments are coming to them in fiull measure. Un debatable is there is not enough to meet obligations.  There are only two questions: at what per cent is the system short, and in what time frame will the news get out.  And then, how will peple repsond to the new reality.

But the fights will be in asset class categories:

Namely, would the value of corporate equity have soared from $1.3 trillion to $36.5 trillion or by 28X since 1981 in an honest free market?

Got equities?  Equities are not private credit, they are savings invested.  How would collecting 1/28th of your claims impact you, or just 1/2?

Now comes the course of credit hperinflation:

Next, throw into the mix the Fed’s severe interest rate repression in the bond market and you get more financial inflation. When debt is priced drastically below its economic cost and receives a deep tax subsidy to boot, a variation of the supply side theorem manifests itself. Namely, when the cost of servicing debt capital is made artificially low, you get a lot more of it—–from the public and private sectors alike. As to the former, the present day proclivity of politicians to kick-the-fiscal-can is a direct consequence of financial repression.

and then how come your pension will be bust...

With respect to the latter, consider the explosion of corporate bond issuance, which in 1981 amounted to just $550 billion of outstandings or a mere 17% of GDP. Today that figure is $11.6 trillion or 20X larger and amounts to 65% of GDP. Yet, self-evidently, that explosion of new borrowings did not go into the acquisition of productive assets. If it had, real GDP would have grown a lot more rapidly than the 2.7% rate recorded for the 33 years ending in December 2014—-and by the mere 1.1% recorded during the sub-period since Q4 2007.Instead, the debt was overwhelmingly used for financial engineering—-or what is ultimately a Ponzi scheme by which new corporate borrowings are used to shrink the outstanding float of stock via LBOs, stock buybacks and cash M&A deals. Consequently, carry trade gamblers are enabled to bid up the shrunken supply of secondary market equities to ever higher levels.

The above is where your pension contributions go... and went...

Not surprisingly, therefore, the US corporate sector’s market capitalization has exploded from $2 trillion in 1981 to $48 trillion at present. That’s right. The nominal value of corporate debt at par plus equity at market has risen by 24X, and most of that gain has occurred since the inauguration of monetary central planning under Greenspan in October 1987.

That is not employees accepting a delay in a paycheck, or wholesalesrs extending credit to retailers, that is Amazon, Google, Walmart, Petco, Lowes, Homedepot wiping out the small neighborhood stores.  The means for that tactic is over.  There will be a vacuum of demand for small business unknown before in history.

Then this:

Stated differently, had the US economy not been “financialized” over the past 35 years and if the historic 200% ratio of credit market debt and corporate equity at market value still prevailed today, the size of the financial system would be $35 trillion, not $95 trillion. On a playing field $60 trillion smaller would there not be far fewer fast money sharks churning, scalping and strip-mining the secondary markets in stocks, bonds, loans and their derivatives?

OK  so figure about 2/3rds of your pension is forfeit... will that be OK for you?  Anyway... you can always work more for others:

But here’s the thing. Maybe 100,000 people “live large” off today’s $95 trillion casino. By contrast, according to the Social Security Administration’s wage records, there were 100 million workers who held any kind of paying job during 2013, who earned a collective total of just $1.65 trillion that year. That amounts to the incredibly small sum of just $16,500 per average worker——and not for a small slice of the labor force but fully two-thirds of all Americans with a job. 

Or work for yourself...  but work you will.

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Capitalism vs Free Markets with Co-ops

After yesterday's lesson below on how labor is the source of original credit in an economy, we can now appreciate how Marx was on to something about workers owning the means of production.  This too is loopy, but no more so than management owning the means of production as in capitalism.

If not labor nor management, then who?  Well, of course, the customers. The right form of business organization is the co-op, which is customer-owned.  In Seattle we have REI, Group Health, PCC, and plenty of co-op housing.  Recreation, health care, food and housing to name a few, and all far more robust than their "investor owned" competitors.

We had an excellent labor movement in the USA until it was hijacked by govt, but it is now time to return to a labor movement that negotiates with the professional managers who run the co-op for its customers.  Given what labor brings to the table, credit, this understanding may lead to a more equitable distribution of the profits of the operations.

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$200 Trillion Debt: How You May Thrive

My next book is delayed for a desire to incorporate absolutely cutting edge info on how to navigate this profoundly changed economy.  Read this and then see my comments...

Global debt is now in the region of $200 trillion. The McKinsey Global Institute recently published a report highlighting the bloated, unsustainable levels of debt that have been accumulated globally and the huge risks when interest rates begin to rise again.McKinsey concluded that total global debt was $199 trillion and the little covered report was released in February - 3 months ago - meaning that the figure is likely over $200 trillion. With a global population of 7.3 billion this works out out at over $27,200 of debt for every man, woman and child alive in the world today.Almost 29% of that debt - $57 trillion - has been accumulated in the relative short period since the financial crisis erupted in 2007 - just 8 years.

Interest rates will not rise again for the next 40 years, anymore than they will issue four trillion dollar Zimbabwe currency units.  Credit is in hyperinflation, and it is worthless to the economy, the real economy.

In Zimbabwe, they also worried over the false economy.

I realize I have been saying "credit deflation" but the last week was a revelation.  Credit is beyond hyperinflation, it is now worthless.  But prices are dropping in the real economy, deflation, as currency is destroyed, and fewer dollars are chasing the same amount of goods and services, inside the real economy.

First time I ever used italics in this blog.

Worthless credit is chasing worthless assets making up for most of the reported economy and growing that massive debt.  When a person who simply will never pay for a new car he "bought" from a company that is on life-support, like GM, who offers unneeded cars of inappropriate design to the market, then multiply that across our entire economy, and worldwide.

And this explains why GE has abandoned its credit division.  Creating debt through off-balance sheet, no reserve requirement stand-by letter of credit facilities (technically how they do it) has no future.  GE is throwing junk overboard to focus on real economy machinery and equipment.

Read on in the article to see the angst and worry over the right "policy."  The policy will focus on fighting over what real assets are, who owns them, once marked to market.  It is absurd the notional debt above the value marked-to-market assets will ever be paid.  So there will be amazing fighting over who gets what, when the simple solution will be to start your own business.

Count on it, if capitalists experience any emotion at all, it is entitlement. They will struggle perniciously to keep what they imagine is their due, and will end up with ashes.  We non-capitalists, we few free marketers, will thrive beyond imagination and under the radar, without ever breaking a rule (in capitalism, almost all small businesses necessarily are at least bending the rules).

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The Origination of Credit in an Economy

So I posed the question yesterday, after reciting how credit was once extended through the economy with no interest whatsoever.  the bank have crowded out this good interest with asset-less backed bad interest, (tautological) at interest and have grown into monsters, too big to fail.

The question?

Now, you tell me...  of all that old-school credit extension, starting with the extractors, and ending with the fellow who goes into the pub and gets a beer on his tab...  all that credit stats with the extractors...  where do they get their credit to pay for the extraction.

The answer: anyone who receives a paycheck. All earners extend asset-backed credit to their employer.  You wait a week, two weeks a month to be paid.  That credit extended, while you extract tin in the mine, to your employer, who has organized operation such that collectively more money will come in from selling the extracted tin than costs to extract it, including the cost to pay the labor.  This credit extension continues as the processor employees extend their credit to their employers, the manufactures employees do likewise, the wholesalers and retailers, and ultimately the miner who comes in for a beer on his tab is good for it because that miner has extended credit to his employer.

Reflect on how much credit, non-interest based, asset-backed (production) is extended at any given time.  Well, it equals all payroll due at any given time.  Hundreds of billions in float?  Truly, employees must be the single largest banker on earth.

Banks have usurped the economy, hijacked it to their ends, turning USA into a FIRE (finance, investment & real estate) economy, and easing production out of our country.  The only way to change this is to return to the patterns and practices where we extended credit and the banks are a minor player in the economy.

Don't count on it.  But there is nothing to keep you from doing this unilaterally, and enjoying outsized results as those "invested in the capitalist economy" turn on each other fighting over too many claims on too few assets.

Start your own business now.

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Trade Data Errata

If you use trade data heavily as a competitive advantage, bum information jumps put and aggravates.  Happily I discovered the department that addresses bum trade data information.  I sent in clearly wrong info on Caviar exports from USA...

This refers to your email concerning the unit price for exports of caviar (Schedule B number 1604.31.0000) to Japan during 2014. We have reviewed the data and have revised the reported statistics. Please make note of the following attachment and revisions to our published statistics. Thank you for your interest in the accuracy of our trade statistics. ... The attached revisions are also available on our website at: www.census.gov/foreign-trade/statistics/corrections/index.html In June, our revised monthly data for the three prior years will be available through our on-line data product, USA Trade. For information on our current revision policy go to: www.census.gov/foreign-trade/guide/revisions.html

So the new numbers, which you can click through, make sense.  Let me know if you find data that cannot be right, and I'll refer you to the right source to advance corrections.

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China: If Not Capitalism, How About Free Markets?

OK, so Communist China mastered capitalism, and are now in a jam.  Since they own Hong Kong, they ought to next try free markets, or more anarchistic hands-off policies:

The quarter-percentage-point reduction in benchmark lending and deposit rates on Sunday was primarily aimed at addressing debt-repayment problems that are increasingly weighing on the Chinese economy. But the rate action is likely to bring less benefit to the small companies that Beijing is counting on to shift to a more sustainable growth path, largely because Chinese banks remain reluctant to lend to them.To prod banks to make credit more accessible for borrowers the government wants to promote, the People’s Bank of China will speed up “targeted” measures in the coming months, according to PBOC officials and economists, giving banks more liquidity on the condition that they lend more to these groups.

Pushing on a string, it is not going to work.  They need to allow everyone to extend credit usury-free asset backed credit, and leave alone those who do well.  Best policy is to do nothing, now that all other policies have failed.  This will sort itself out, if left alone.

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Bad News for Big is Good News for Small

The bad news, for those invested in the capitalist system, is relentlessly bad.  Happily for the rest of us, there is an alternative to capitalism and communism, and that is free markets.  HSBC, the best bank in the world, notes the policy makers have no more means, we've hit that irrational end:

Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.

There is, as explained below, and option.  To me this is all good news.  Small business will make a comeback, no matter what.

Start your own business.  If you have no resources, no skills, no money, no product or contacts, well, that is how everyone who thrives starts, and when it gets going, it is clear to you it is your business you started.

I teach that, and next week I have an online class on exporting food.  Sign up here....http://seattleteacherscollege.net/exfoassmbu.html  Be part of the solution, as they say on the airplanes, put on your own oxygen mask first.




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How To Play The Current Economic Events

Followers of this blog may have noticed I've left off for a week.  Events conspired to put me elsewhere, but this is the work I chose.

It was good to sit back and reflect on what has been going on the last month, highlights being -

1. McDonalds 11% off the top and 13% off the bottom line misses, one in fifty stores closed (as just an example of one of countless other chains cutting back.

2. GE gave up its ability to print money.

3. Two trillion in euro-bonds at negative interest rates.

4. Chicago pensions go junk rating.

5. USA Banks are testing cashless regimes and outlawing storing cash in safety deposit boxes (with inspections as part of the deal?)

6. Stock buy-backs are luring people into maliciously rising equity prices, and feeding real estate boom again.

What would you do if all of the connected and insider folk were buying boats and stocking them with food?  Would you look into it to?  But then, when you did, the new rules say you may not buy a boat nor stock up on food.  Would you get nervous?

Well, that is in essence what is going on in the face of these epochal changes.  Naturally your mind might turn to revolution, but that is a false dilemma.  There is an alternative that is actually better than "stocking up a boat (which is forbidden to you) or violence.

That is simply starting your own business, it does not matter what, I teach small biz int'l trade, it could be food truck for all  care.

If you see how we got here, you can then start to see the way out.  What we have is massive misallocation and malinvestment.  The pensions are misallocations of credit, and malinvestment is the financing of the unproductive and unneeded.

All of this flowed from the creation of credit by means of the stand-by letter of credit facility granted by charter to banks, which is both off the balance sheet and has no reserve requirement, mischief begun in the mid-70s and went wild when its first failure was bailed out by uncle sam.  There is no rational limit to how much can be lent, but there is an irrational end to it, which apparently we have reached.

All this comes from the inevitable failure of lending asset-less backed credit.  The circumstances are dire, for those who are invested in the circumstances.  If you are invested in it, you'll be inclined to fight fo what you will lose anyway.  That is time taken away from working on THE solution, that happens to be also YOUR solution.

The key, the utterly contrarian position right now, is to forget your "investments" and start our own biz. As far as I know , I am unique in arguing this, but who in the financial press would say "get out"?

And the key to the start -up is credit, not this asset-less backed fraud we've had for the last 40 years, but the bad credit that crowded out the good credit.

Think of this...  the extractors dig up tin and sell it to the processors with 30 days to pay...  the processors turn it into sheets and sell it to manufacturers with 30 days to pay...  manufacturers create goods and sell it to wholesalers with 30 days to pay...  wholesalers to retailers another 30 days... and then retailers to their clients, another 30...  all this was how the world worked prior to circa 1975 as the banks learned they could get away with creation of credit by means of the stand-by letter of credit facility granted by charter to banks, which is both off the balance sheet and has no reserve requirement. think of how massive that private credit was, and all asset based.  Plus, never a dime in interest charged.

Think of how today it is all through banks, and all interest bearing, in spite of the fact the vast majority at loan at interest has no asset behind it at all!  No wonder banking is so huge, and the powers that be bail it out.  It is the source of their power.  But it has come to an end.

Before then, people patronized the corner store, and paid their bills at the end of the month.  The community kept itself in check, people behind for a sick kid were cut slack on catching up, people who were profligate got their credit cut off.

But then came massive credit, asset -less backed, junk bonds... and Office Depot rolled up all of the corner stationery stores, Lowes rolled up all of the corner hardware stores, Petco rolled up all of the corner pet shops, Walgreens rolled up the corner pharmacies, Vons/Safeway etc the corner grocery...

You got cheap food, bad food, obesity and unemployment, but who cares, government rolled up the charities and now you get "free health care" although it is amazingly expensive and rather narrow in scope.  Everybody seems to have the exact same diseases, not matter what symptoms they report.  Or you would think from what BigMedicine has to offer.  You shift from a few nice things you keep to crap you toss pretty quickly after a newer cool junky thing appears.  Now we are down to pixellated fascinations, my facebook page vs my human connections.

Now, we see how we got into this mess.  I urge you to in essence "write off" (emotionally) your property, paycheck, pension and focus on building a business.  Note all of that credit above, among the players, in the good old days.  Well the work is to go back to where we got off track, circa 1970.  You will be too small to make illegal (I never advocated breaking any rules), and your creativity will be uniquely challenged.  You will thrive under the radar, and the key is to re-join the credit extenders, as in the old days.

Now, you tell me...  of all that old-school credit extension, starting with the extractors, and ending with the fellow who goes into the pub and gets a beer on his tab...  all that credit stats with the extractors...  where do they get their credit to pay for the extraction.

Understand this, and you "get it" all...  ready to experience rare anagnorisis?  Answer this question...  before I reveal it tomorrow.

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