Entrepreneurs Do Not Take Risks

When I first read that back in the mid-1980s, written by Drucker, I was astonished.  How could he say such a thing?  All I ever heard was entrepreneurs and risk were one of the same.  Then I began to reflect on what I had learned so far in business, and realized he was correct. Everyone with whom I was familiar and was successful never took risks, they worked to eliminate risks in the business process. Entrepreneurs do not take risks.

So how come we all hear "entrepreneurs take risks"?  At the risk of achieving sic passim, believe it or not the idea only got started with, guess what, ex nihilo credit in the 1970s.  How come?   Well, once you set up an ex nihilo credit regime, there is no rational limit to what can be lent, because literally nothing is being lent.  Only debt is being agreed to...  well, with a limitless supply of debt on offer, at zero cost to the lenders, well, how do you lend all of it out?

First you must socially condition people to borrow more than they need, and to do so you must overcome their natural prudence and common human sympathies.  What worked was to socially condition through media, schools, entertainment and government the idea that entrepreneurs take risks.  Borrowing from banks (who had "risk capital") was step one in an entrepreneurs saga.

According to Merriam Webster, the term "risk capital" first shows up in 1944.  Since business start-up has been around since Cain settled down after bumping off Abel, is it not a little odd the idea of "risk capital' does not show up until 1944?  These are early abuses of the term, and meanings change as people grab an emerging use to apply to an urgent need.

Let's look at some etymologies -

risk (n.) 

1660s, risque, from French risque (16c.), from Italian risco, riscio (modern rischio), from riscare "run into danger," of uncertain origin. The Englished spelling first recorded 1728. Spanish riesgo and German Risiko are Italian loan-words. With run (v.) from 1660s. Risk aversion is recorded from 1942; risk factor from 1906; risk management from 1963; risk taker from 1892.

So the word risk itself is fairly new, in light of how long we've been doing business on earth.

risk (v.) 

1680s, from risk (n.), or from French risquer, from Italian riscare, rischaire, from the noun. Related: Risked;risks; risking.

Etymology[edit]

From earlier risque, from Middle French risque, from Italian risco ("risk"; > Modern Italian rischio) andrischiare ("to run into danger"). Most dictionaries consider the etymology of these Italian terms uncertain, but some suggest they perhaps come from Latin *resicum ‎(“that which cuts, rock, crag”) (> Medieval Latinresicu), from Latin resecō ‎(“cut off, loose, curtail”, verb), in the sense of that which is a danger to boating or shipping; or from Ancient Greek ῥιζικόν ‎(rhizikón, “root, radical, hazard”).

A few dictionaries express more certainty. Collins says the Italian risco comes from Ancient Greek ῥίζα‎(rhíza, “cliff”) due to the hazards of sailing along rocky coasts. The American Heritage says it probably comes from Byzantine Greek ῥιζικό, ριζικό ‎(rhizikó, rizikó, “sustenance obtained by a soldier through his own initiative, fortune”), from Arabic رِزْق ‎(rizq, “sustenance, that which God allots”), from Syriac [script needed]‎(ruziqā, “daily bread”), from Middle Persian [script needed] ‎(rōčig), from Middle Persian [script needed] ‎(rōč,“day”), from Old Persian [script needed] ‎(*raučah-), from Proto-Indo-European *lewk-.

Cognate with Spanish riesgo, Portuguese risco

The word is a good one, but notice it has more to do with logistics than with business dealings; as to the soldier taking risks, well, war is hardly business, and from the beginning soldiers have had to over run their opponents to gain the necessities to fight.  Rebels assault the armory.  Again an ancient idea, but not business, not trade.  In logistics, oh yes indeed, there are risks, but here again, and expressly, entrepreneurs since the Phoenicians ruled the waves have mitigated risks.  Marine insurance is arguably charity, not insurance, since those whose goods go overboard are made whole by those whose goods did not, thus arguably even halal, especially since the relationship ends with the docking of the vessel.

More here...

So to move from risk in logistics, the problems of time space and matter and botlenecks, and move the idea over to human action took some doing.  But they did it.  How?  Social conditioning, just like today when your smart phone tells you what to think, what to like, where to go, what to do.  (Yesterday a cabbie became perplexed when google maps told him to go one way, and Garmin another...)

Check this bit of research out...

A look at Google Ngram – a search engine tool that allows you to see how often a given word is used across books, newspapers and magazines through time – shows that the usage of “Risk” was fairly stagnant from 1800 to the early 1960s. The frequency with which it appeared during this 160 year stretch ran from 0.002% to 0.004%, about as often as words like “Poverty” or “dog”. Starting in 1970, however, “Risk” became a hot topic. The frequency of its usage increased by over 3.5x, peaking in 2006 at 0.015%. That may not sound like a lot, but the word “Risk” now appears in print four times more often in English-language press than the word “Weather”, according to Ngram. And you know how popular the weather is…Source:Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York.Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Well, there it is.  After 1971, when Nixon went off the gold standard (lite), the hegemon got to work flogging the idea of risk as central to business.  We've always had fake news and state controlled press, and they did their work.  A term normally associated with logistics is hijacked and applied to human action, business, in order to get their cannon fodder to soak up as much of this ex nihilo credit as possible, and enslave them.

Terms do not just show up universally adopted one day.  They need time to incubate.  You can study such incubation of any given word at the Oxford English Dictionary site, and see how at high levels (academia) the idea of risk and investment begins to emerge even 100 years ago or more, with the dates and works in which a term was used.  This demonstrates how slowly a critical mass forms as more an more people address the idea in their own works.  Certainly before Nixon's move there were people referring to risk in investing.  There had also began the implicit criticism of NOT taking risks, with the term risk-averse first showing up in 1961, and the illiterate version of risk-adverse showing up in 1969.

Just as it takes time for a term to solidify, and the idea behind it, it takes time for the idea to have its intended effect.  The point of misinforming entrepreneurs was to get them to take risk in the form of borrowing ex nihilo credit.  Although it was in 1971 that Nixon made lending ex nihilo credit lending possible, bankers needed proof this would not backfire on them.  Two entities that massively borrowed ex nihilo credit when Nixon changed the rules, Chrysler and Penn Central, went bankrupt, Uncle Sam bailed them out.  Bankers then understood.  In the ex nihilo credit regime, profits are privatized and the losses are socialized.  All that was left was how to carry ex nihilo credit loans on the books?

I have in hand a 1983 seminar manual for bankers, "conducted throughout the country", in which bankers are instructed to lend credit instead of money.  (Note bankers know the difference, even if you are not allowed to know the difference.) How?  There is the problem for bankers of reserve requirement and the bank balance sheet liability of such action.  The solution is clever.  Put the ex nihilo credit loans under Standby Letters of Credit, which at once have no reserve requirement and is off balance-sheet financial statement category.  Sound familiar?  The idea was so evil and contrary to sound banking, that the manual carried a sign letter of endorsement from a regulator for the Governors of the Federal Reserve System.

(As a side note, this scam is also the basis for gold leasing, specifically mentioned in the manual, and a matter of great concern worldwide, with Germans and Italians, etc, demanding that gold supposedly in USA for safekeeping be sent back to Germany, Italy etc..  Problem is, the gold may be in China, and legally so, for apparently people did rash things under "gold leasing.")

As each banking disaster occurred, and taxpayers picked up the tab, the practice got worse.  S&L Crisis in the early 80s, the the 87 crash, the 97 crash, the dot com bust, 2008... not to mention the countless individual disasters.  In every instance, the banks get bailed out.  We are now at total saturation. When Boeing builds a jet, ExImBank creates ex nihilo credit for India to buy it, it costs nothing for India to be a customer of Boeing.  The USA taxpayer is on the hook for any default.  Boeing takes the profits.  When an unemployed 18 year old stops off at a gas station and pays for two corn dogs and a supersize drink with his EBT card, the ex nihilo credit is created at that moment.  Again, it it added to the taxpayers tab. What appears to be happening is this regime is over.  The beneficiaries of this boom can no longer get any benefit.

Airlines are dying for too many airplanes.  I flew Seattle Paris round trip at Christmas holidays, $650 (about $400 taxes, $250 to the airlines).  McDonalds can't find anymore victims.  Sorts Authority cannot find enough people who want more junk.  The dinosaurs are dying.

We all love a system that works for us, even if it doesn't.  What Busby Berkeley learned in the 1930s is you could make a lot of money showing unemployed people movies about rich people living it up (We're in the money!)  Hope is a theological virtue, but it can be hijacked by bankers, and affixed to nothing, giving false hopes.  It is cruel, but the victims are all willing accomplices.

By the way, tell me, what is the primary job of the United States Secret Service?  Do you know?

Here is some more reading, which only bolsters my argument.  These open as .pdfs, and here.  That last one, if viewed in terms of promotion of ex nihilo credit, is devastating to modern economics.  Out of the mouth of babes!

Entrepreneurs do not take risks.  The regime that was based on that is dying off.  What always was and will always be is customers.  You need customers, not finance.  Find customers, and you'll succeed.  And I teach how to find customers first.

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China Working to Replace USA as #1, The Way USA Did It

If you want a key to understanding China policy, just keep this mantra in mind: China is working to replace the USA as the worlds sole superpower, using the exact same means USA did it.  There is no policy too arcane to miss being adopted.

To be supervised by the People’s Bank of China, it will be the official platform for the trading of bills of exchange in China’s interbank market, according a PBOC document.
With an initial registered capital of 1.85 billion yuan (US$269 million), the platform will allow the first batch of 43 financial institutions, mainly banks, to conduct a trial run from today to February 17, Caixin said earlier.
Financial institutions participating in the platform will need to register the relevant details of the paper bills into the system, and switch the transactions from offline to online, the central bank’s document said.
Bills of exchange, a short-term debt instrument commonly used in financing international trade and small businesses, can be sold among banks at a discount before they mature.

When the USA FED system was deployed in 1913, a huge effort was expended trying to get private credit extended between businesses (vendor financing) pulled into the banking system (where it could interest could be applied and also taxed, a double whammy).  (Search "bills of exchange" on this page to read the new provision in law that he FED so assiduously attempted to foist on industry.)

Even when companies pledged receivables against loans, this too (factoring) was in private hands.  Now the banks have it.  And it gets taxed.  Ouch.

The effort failed miserably, for at the time no business was foolish enough to take up the offer to lose money on sales (the discount mentioned in the quote) and in essence make taxation likely as transaction ran through the banks.

Getting businesses to screw themselves failed, but getting end-users, the consumers to do so succeeded wildly.  Issuing ex nihilo credit based credit cards did the trick, but not until the 1980s, over sixty years later.

Part of China's spectacular growth and success is when they adopt a USA practice, they can skip all the learning hat took 60 years, and on day one match the USA.  China has the ex nihilo consumer credit card system in place, plus the internet and computers to tax immediately and at the most granular level.

When China matches USA, and has the system proofed, they need only back off a few degrees and then China services to the world are preferable to the USA services.  And as anyone in the China trade knows, the Chinese can and will always go a penny less than you, for the same thing.  Trump calls China beating us at our own game "cheating" and "currency manipulation."

The upshot is the entire system is market-distorting, leading to malinvestment and misalloction since we have goods and services called forth based on ex nihilo credit, not wealth as defined as the range of goods and services called forth by people using their own money to purchase.  The Chinese take over of all this will not make the world a better place, except for the fact it will cost a bit less now that the overhead-driven USA economy will lose out.

Of course with free markets we could beat the Chinese, but as a nation there is no interest in free markets.  It is down to individuals to trade in a free market mindset in order to avoid the disasters coming.  Free markets are always unilateral in action.

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Dow 10,000 or Gold $10,000?

This fellow is apparently famous, and I can see why, because he nails it... here are two snippets:

Stocks have been a massive beneficiary of the biggest monetary expansion that the world has ever experienced. If we look at the Dow since the last major economic cycle started in the early 1980s, we find the most remarkable rise. In early 1980, the Dow was at 850 and today we are 19,000. That is a rise of over 18,000 Dow points in 36 years. This means that the Dow has gone up by 9% per year on average since 1981. A 9% annual increase leads the index doubling every 8 years. What a great investment. You buy stocks in 1980 for $10,000 and today in 2016 you have $220,000 without having to lift a finger. On top of that there has been a dividend yield of around 2% on average. But this growth in the stock market has not just happened on its own accord. Stocks don’t grow at 9% annually for 36 years without some rocket fuel. And the explanation is very simple. Debt has provided the fuel. Because US debt has also grown by 9% annually since 1981. So the recipe for becoming a successful and loved president is just to print and borrow money. There is an absolute correlation between the increase in US debt and the growth in the stock market.

and

The Dow/Gold ratio peaked in 1999 and is now in a downtrend. Once the current correction is finished the ratio will continue down towards the 1:1 level like in 1980 when the Dow was 850 and Gold was $850. The only question is at what level the Dow and gold will be when they reach the 1:1 ratio. Will it be Dow 10,000 and Gold $10,000? Or will we see hyperinflationary levels of 100,000 Dow and $100,000 gold? The absolute level is really irrelevant. Because at whatever level they meet will involve a catastrophic loss of real capital for a stock market investor.

Just so...  when he says credit, he means "ex nihilo credit" and for that matter he means that when he says "printing money."

The article mentions real estate crashing, which is crucial to a boom in small business.

His summary is buy gold, and if buying gold, his advice is good.  But if gold becomes important, the Hegemon will just steal it.  The only real protection is self-employment, own the emans of production, in the form of fruit too high and dispersed for the Hegemon to get around to....

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Start-up Requires No Funding

Funding a start-up is risky, and as Drucker noted, entrepreneurs never take risks.

The risky part is not for those who assign a bit of ex nihilo credit tally to a given start-up, but to those who sign the slave papers in return for the granting of ex nihilo credit.  Now that is risky. You might end up like a college graduate today, huge debt and unemployed. No need to do that when starting up, for a proper start-up takes no money or credit to speak of.

The banks promote the idea of "risk taking" by entrepreneurs as a means to unload the unlimited ex nihilo credit, the granting of which is no risk to them.

We have at least one generation that has been trained to lose:

get enough funding to live off of for a year or two, and blow through it... who cares if anything succeeds, cuz you get to play "business" for a year or two...  and who knows, great resumes have serial start-up experience.  Those days are over, but the idea is embedded in a generation core curriculum at the universities.  (And as Drucker said you can tell when information is obsolete, the universities make it core curriculum.)

If you are serious about start-up, you must have a business plan that moves forward without funding.  If you are saying "I just need funding" then you are deluding yourself.  If you are saying "I just need customers" you are at least assessing the problem correctly.

Start-up is about creating customers and innovating in the redeployment of excess capacity (or lessor demand capacity) to the end of solutions to problems. (And as Drucker says, there is no solution that cannot be imporoved upon.)

It takes no money to conceive of the solution.

You must speak to the customer at some point, why not first?  It takes no money to do so.  And you walk away from this phase with ideas and contacts, with which you begin to fill your rolodex and files.  And this is critical, to begin to build your "world trade organization" that is the people you've met, with whom your synergies will produce more than otherwise possible.

It takes no money to talk to your customers.

You have no credibility as a start up, so you borrow authority from target customers... talk to them first...  do they say yours is a good idea and does not otherwise exist?

Then you begin to work on the design, which the best is on a royalty basis. Again, done right, no money up front. And as to design, you work only to achieve "enough design" to generate enough orders to cover the suppliers minimum order requirement. Repeat this mantra: customer is the most important thing in business, getting the design right is the hardest.  But even with this in mind, people fail by working way too hard on the design.  Learn from Steve Jobs.

https://en.wikipedia.org/wiki/Apple_I

You learn quickly that in the real world "intellectual property rights" thinking is counterproductive.  Forget about patents, copyrights, trade marks, you get nothing you can use for your time and money. You leave all that behind. With necessary and sufficient product design you expand your world trade association. You begin to discover those whose expertise is in your area, and gather their advice: freight forwarders, customshouse brokers, 3PL, and with it the realities of logistics and costs of your product.  You do not waste time and money becoming expert in international trade, you become expert merely in the international trade of only your items.

It takes no money to gather to get this far.

Please note what "snowballs" here is your solution with customer feedback packed around it. It is what is rolling and why all the other people you contact stick to it getting bigger and ever more momentum (and value).  Each door is opened because of the work getting the previous door opened.  You have not made any money yet, but you haven't spent any either.

Now, you propose importing or exporting (or both?)  Neither importing nor exporting is a business. They are steps in business.   In essence, authentic international trade is simply accessing optimal excess production capacity to the end of production.  Business is buying and selling, not making.  The world is full of production that created no demand.  We do not want to join the 80% of start-ups that fail.

Customers (there is that word again) call forth the product.  We are the impresarios who gather the players necessary to respond to that call.  Yes, we suggested the solution, but the customers power the rationale for all the players you collect to act.  (And I might add, dealing with very talented people each in his own narrow field is a privilege and often breathtaking.  It is also tempering, you just know not to waste these peoples time, you know you must do your best work. Re: best work, see below.)

With importing, you are moving from general (the domestic market) to specific, the best supplier in the world.  In exporting, you are moving from specific to general, the best supplier in the world, to any buyer worldwide. With either, you are discovering markets no one else considered, directions informed with data no one else has created and studied.

This costs you nothing, and you cannot buy it anywhere, it is not for sale.  It is free.

For specialty, the best source is rarely, if ever, the cheapest.  Usually it is more expensive.  We are not achieving perfection in initial product design, any more than Apple's first product was perfect.  We are achieving milestone #3, enough orders to cover the supplier's minimum order requirement, in a workable amount of time, profitably.  Again, learn from Steve Jobs.

https://en.wikipedia.org/wiki/Apple_I

Then you find the best sources for production, and discuss what you've done so far. And now this is where you do your best work, as paranthesied above: you promise nothing except to test this very well informed (by now) idea, by presenting the sample of what you created in the form of products, agricultural items, services, you name it, back to the customers you first encountered in your start-up.

What you are offering is new market study at no cost to the supplier.  Your compensation comes only from customers you create.  Everyone involved gets something for nothing, and you get paid by customers (your markup on all the discovered costs) if you get the design right.  Never promise anything more than to report back on a test.  No one needs anything more, expects anything more, nor would believe you if you promised anything more.

You form a hypothesis and shift from passion/joy to science. You seek out valid and reliable information about the market, you search and learn the contours of a market no one else yet sees.

You may of may not pay for samples, but otherwise it does not cost you money to pay your dues. The less money you spend and the more time you research, the better off your start up. As the carpenters say, measure twice cut once.

Now, here is where people those with funding fail:  since they did not start with the customer, they promise the supplier much in the way of flash and imagery but no customers (or worse, assumed customers).  The wrong suppliers respond to that (or just plain scammers.)  Just as these people begin "selling", things go bad fast.  (Alibaba is the world center for failure match-up.  Amazon and eBay is the medium upon which failure occurs.)

What we promise all of our associates is not a single order.  What we promise is to test against samples the most informed hypothesis of whether there is enough customers collectively to cover the supplier's minimum production run in a workable amount of time, profitably.

Sound complicated?  No, it is quite simple, and may take some unlearning to "get it." It is what the best suppliers expect.  And so far it costs nothing to speak of.

That minimum production run requirement is specifically the LCL MOQ FOB:  Less than container load, minimum order quantity, priced free on board country of origin port of lading.  That is often merely a pallet load.

 In importing we are the ones buying the lcl moq fob, in exporting, we are the ones selling the lcl moq fob.

And if we do achieve the initial goal of enough orders to cover the suppliers minimum in a workable amount of time, profitably, then we execute.  And we are talking a min order qty of one maybe one pallet, no more than say $5000 worth.  Do you really need a venture capitalist for this?  Or a banker? Or even a rich uncle?

And if we do not achieve it, then what we have in hand is market feedback, what is wrong (shape, weight, color, size, package, material, speed, flavor?) with our product.  Aren't you glad you only have samples, not a garage full?  You can go back to your world trade association you built and fix the problem.  And then go at the market again.  These is no excuse for failure, or especially burn out.

You may fantasize some business in which you are paragraphed in the Wall Street Journal.  Sure, if you want, but both Apple and Vandor started the same way.  Vandor never got above $3 million in sales (at least when I was managing it) and you've never heard of it.  The first company I was working for was at that time the same size as NIKE, tiny.  Phil Knight knew no bounds. But the owners of all had all of their material wants met by the business.  Business is about lifestyle, not accumulation, another conept the last two generations need to learn.

And start-up is not about funding. Anyone investing more than $900 or ninety hours before discovering whether they have enough orders from customers to cover the suppliers minimum order requirement in a workable amount of time, profitably is wasting time and money.  I am often pointing out where people are wasting either in their pursuits.

Now as simple as this is, there is many a slip twixt the cup and the lip.  I came of age when it was no problem to walk down a street and see a "help wanted" sign in the window of an import-export company and after two years of learning every part of the business, be travelling the world as a buyer.  Ex nihilo cedit ended all that for now, but the ex nihilo credit regime is over.  Thirty years ago I could see this de facto apprenticeship program ending, so I began to lecture at colleges and wrote a book to fill-in the gap formed when getting a job and working your way up ended.

Those were boom years, and the damage is done during the boom years.  Now it is the bust, where the losses are laid on the living (the rich take the profits, the poor take the losses) and the work of rebuilding a natural, authentic economy is at hand.

Pro sports bore me.  I spend the time most people devote to pro sports teaching, writing and lecturing.  I find it fun and fascinating.  And writing is how I get paid for time spent thinking. The rest of the time I spend working on my own business.  Lifestyle, not accumulation.

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All Loans Are Charitable Events; If Not, It is Wrong

Usury, what we today call interest,  was an unthinkable crime for the first 1800 years of Christianity. Like murder and rape, it occurred, but its practice often carried the death penalty.  The reason is usury is forbidden is because it does harm - it allows the few to aggregate power unto themselves by means of lending at interest, and then you get people literally calling the shots, and war, famine, destruction, all of the things you see around the world today with unbridled usury.

When the church-state struggle began, the state sneaked in usury under the guise of charity, or Monte Pietas.  The state argued it was for charity, the church slowly said they had no say so in the prudential judgment of civil authority.  So the state introduced what the Church forbid, as long as it was "for the children."  Now comes the oldest of these charitable corporations, just as bad as any other...

Banca Monte dei Paschi di Siena S.p.A. (Italian pronunciation: [ˈmonte dei ˈpaski di ˈsjɛːna]) (MPS) is the oldest surviving bank in the world and Italy's third largest bank. Founded in 1472 by the magistrate of the city state of Siena, Italy, as a "mount of piety", it has been operating ever since. Today it has approximately 3,000^[2] branches, 33,000^[2] employees and 4.5 million customers in Italy, as well as branches and businesses abroad. A subsidiary, MPS Finance, handles investment banking.^[3] The bank's main shareholder is the Fondazione Monte dei Paschi di Siena.

As you see, now that it has gone mainstream, it too is failing to perform -

Recall that three weeks ago we warned that “Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization” although we left open the question of “who will get the haircut including senior bondholders and depositors…. given the small size of sub-debt in the capital structures.” Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy’s oldest and according to many, most insolvent bank, quietly commenced a bondholder “bail in” after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender.

Usury is wrong because it does damage.  There is no benefit to lending at interest to be realized, the only result, inevitably is chaos,poverty, war, destruction.  And there are alternatives that give us what we need without the damage done by usury.

We need to rediscover those, repopularize those.

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New York Times Does Not Know From Free Trade

Amy in Malaysia sends in article from the New York Times.  It is a whopper, an essay on "free markets" and the problems thereof.

These costs have proved overwhelming in communities that depend on industry for sustenance, vastly exceeding what economists anticipated. Policy makers under the thrall of neoliberal economic philosophy put stock in the notion that markets could be trusted to bolster social welfare.
In doing so, they failed to plan for the trauma that has accompanied the benefits of trade. When millions of workers lost paychecks to foreign competition, they lacked government supports to cushion the blow. As a result, seething anger is upending politics in Europe and North America.

Well, that is not free markets.  It is managed trade, and yes it is a mess, and yes government has not, because it cannot, even if it wanted to, ameliorate the damage done.  I am happy to call it "neoliberal" economics, and yes it is a mess.  But free markets are the only antidote to the problem.

In the United States, the Republican presidential aspirant Donald J. Trump has tapped into the rage of communities reeling from factory closings, denouncing trade with China and Mexico as a mortal threat to American prosperity.

Well, I doubt Trump denounces trade with China and Mexico. Sure he denounces the trade deals, and this is typical false-dilemma argument: trade is what the Hegemon calls it, and there is no alternative.  He and Hillary are posing as anti-TPP TTIP candidates, for the time being, but both of them will cut some deal, when the only free market deal is unilateral.  In free trade, we have no opinion on what crosses borders; the legal fiction is the importer is the manufacturer, so we hang USA importers for problems, not blame the Chinese.

“The trade policy of the European Union is paralyzed,” said the Italian minister of economic development, Carlo Calenda, during a recent interview in Rome. “This is a tragic situation.”

Tragic for whom?  For Ministers of Screw-the-Prole?  What does he mean?  Trade in Eurozone has ended?  The only thing that has ended is the game of playing with ex nihilo credit at interest, which has no rational basis, so is ending for no rational reason (meaning we'll never see it coming, nor understand why it ended).

Years of investment manias and financial machinations that powered the job market have lost potency, exposing longstanding downsides of trade that had previously been masked by illusive prosperity.

"the job market" as if the only job market is the one in place, as if it is not a false economy job market.

The worst financial crisis since the Great Depression has left banks in Europe and the United States reluctant to lend. 

This is absurd!  They lend like crazy, for credit cards, autos, student loans: fog a mirror, get a spanking new degree, car or vacation.  Bonds are debt, money lent.  We have 13 trillion in bonds at negative interest rates, which can only be viewed rationally as a mania to lend.  What is ending is people who can take on more debt, or, those who qualify don't want it, those who want it, don't qualify.

And as Pynchon notes, just get them to ask the wrong question, and the answer does not matter. (Classic example: Trump V Clinton.  The answer does not matter.)  We do not need banks lending anything in a free market.  What we need is asset based credit, at no interest, which any business is free to generate on its own.  That is necessary and sufficient for a sound prosperity.

... said Chad P. Bown, a trade expert at the Peterson Institute for International Economics in Washington. “There were people talking about these things, but they weren’t taken very seriously at the time. There’s a lot of policy regret.”
“We do need to have these trade agreements,” Mr. Bown said, “but we do need to be cognizant that there are going to be losers, and we need to have policies to address them.”

"We?"  "Policy regret?'  I shall be sick directly.  As if anyone cared in the slightest about who got hurt as wealth was concentrated, the old tried and true way, through interest.  But on steroids: interest on ex nihilo credit.  As Mr. Bown implies, all policies have winners and losers (except free trade, which is no policy at all) and he has a job talking about what to do with losers.   No, we neither need these managed trade agreements nor policies to address the losers, as no trade policy means no losers.

China targeted crucial industries for domination, lavishing favored companies with sweetheart credit terms while investing aggressively in ports, highways and electrical generation. Anyone with ideas about organizing Chinese labor risked landing behind bars.

Yes, yes, yes.  China adapted exactly the same policies USA used to get some bankers "rich."

The rugged country of western North Carolina suffered mass unemployment as Chinese-made wooden furniture put local plants out of business. So did glassmakers in Toledo, Ohio, and auto parts manufacturers across the Midwest.

No, no, no!  The unemployment started in the 70s and 80s as the roll up of the local retailers by anyone willing to borrow massive amounts of ex nihilo credit (junk bonds, anyone?) Indeed, whoever borrowed the most won. In my book I mention Levitz wiping out Kreoehler, which in the 1960s had 8,000 people making furniture in USA, but by the late 70s was foundering.   They got nailed by the folly of price cutting, "making up in volume what they lose on each sale.." Sports Authority, Petco, Lowes, Micky D, CVS, Safeway, Best Buy, these are the last dinosaurs standing of a economic scam that wiped out USA small retail and gutted USA manufacturing.  Times Kroehler by 10,000 and you see what happened in USA when banks started lending ex nihilo credit at interest.  The program began to die in the late 70's, for as with today, ex nihilo credit leaves a scorched earth.  We had that lats 70s recession.

But then, and I was there to watch it, Deng Xiaoping opened China, and offered USA big business the exact same ex nihilo credit deal Uncle Sam offered in USA.  Uncle Deng gave USA bankers a whole new lease on life, a massive ex nihilo credit pool, and USA industry was completely hollowed out, with our big #1, autos, now gone full Zombie.    Now we lack USA manufacturers, USA small retail, and our pride and joy, the big box discounter, is dying.  We have not much left.  But this does leave a huge vacuum, and opportunity for a renaissance in USA authentic economy.  We'll need to shift back to materialism from consumerism, that is buy a good coat that lasts 20 years (I have a pair of Allen Edmonds shoes I bought in 1984, paid cash, still the best looking shoes I've ever seen.  Resoled countless times and "reconditioned" once.  Consumerism is buying a new pair of shoes each year. On credit.)  All we need is the will to rebuild America in spite of the evil we invited in, accepting ex nihilo credit regime, at interest.  We just man up, and get to work.

“I had to tell my son that he can’t go back to McKendree for his junior year,” Mr. Morrison says, straining to choke back tears. “He has to go to community college.”
He swallows hard. Tears emerge from the corners of his eyes.
“It just crushes you,” he says. “I didn’t get to go to college. I wanted my kids to succeed. When you see the disappointment in your kids’ eyes. …”

Well, spare the rod, spoil the child.  You were willing to slack off during the boom contributing to the damage, and now you just break down and cry when a little adversity strikes?  Now, if a kid has the temerity to look at you with disappointment, then he needs a good slapping around.  The two of you ought to be contributing your unique gifts to building an authentic economy, not crying over disappointments.  Sheesh!

In China, farmers whose land has been turned into factories are making more steel than the world needs.
In America, idled steelworkers are contemplating how to live off the land.

Right.  What goes around comes around.  USA did this to the world, and the world is now doing it to the USA.

Stop our wars.  Deregulate something, anything.  Medicine?  Banking?  Education?  It does not matter what.  Just free a field up, any one of them, for everyone of them has so much repressed potential that the intire USA and its unemployed 94 million, would be offered prosperity and opportunity.

The way out is the way in.  Import what you want, using the excess capacity now overseas, and as you build markets in USA, transfer the manufacturing back here.  If we are still America we can do this.  If we do not wallow in self-pity because a a fantasy did not play out.

The most revolutionary act an American can perform is to start up a business.  I teach that.  You can find links on the upper right of this blog, and at http://www.johnspiers.com/Teaching.html .

Illegitimi non carborundum

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$8 Trillion in Corporate Bond Junk

When you "buy debt" in the form of bonds, you ostensibly give your money to a company, with the view they will pay it back in time with interest.

Once upon a time, such deals were made with companies that actually make things, and they used the money to upgrade factories, or make products more efficiently, or perhaps buy a company from which they bought 100% of what a company made, like a shoe company that bought 100% of the shoelaces a shoelace company made.  Well, they might as well buy the shoelace company.

Today people are buying debt from companies that make nothing, but there is a symmetry here, they are paying for the debt with ex nihilo credit, so nothing is actually happening except people are blowing up bubbles and making claims on the productive capacity for themselves..

Now the problem is some of these buyers are using ex nihilo credit allied to your pension account.  So?

But it's important to keep an eye on the growing influence of tech companies over U.S. debt markets. While many of the borrowers will likely stick around and repay investors, some inevitably will not. And this will have a bigger effect on anyone who owns a piece of the $8 trillion U.S. corporate-debt market, which is more investors than ever before. 

Well, do you see $8 trillion in productivity and manufacturing advances in the last few years?  No?  Well, neither did I or anyone else.  What you did see was bond traders who made commissions on $8 trillion in placements.  And they are set, who cares what happens after that.  When most of that goes "poof" so does your tally of ex nihilo credit to your account.  You no longer can draw on the tally of your ex nihilo credit to make a house payment, or buy food for that matter, because it no longer exists.  Since the obligation to you is gone, country got more wealthy, under an ex nihilo credit regime, because nobody owes you a pension any more.

Best to get self employed.

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Why Are Free Trade Agreements Controversial?

First, because none of the agreements are about free trade, they are about managed trade.  Free trade is unilaterally imposed, never by any agreement.

Second, all agreements have winners and losers.  The winners all very much love the agreement, the losers very much hate what will happen to them if the agreement goes through.

Third, they are difficult to undo.  Once the damage of implementation is done, it is hard to recover a balance.

Globalization is not what people think or say it is, it is simply the export of the ex nihilo credit damage done overseas by the USA.  After wiping out USA small industry and manufacturing, the mega-biz dinosaurs went rampaging through other countries.  China and Venezuela are examples.  China was big enough and backward to absorb the shock, Venezuela was to small and too modern to take the hit.  Everyone else is somewhere in between.

It's dangerous to have a theory of everything, but you'll note all economic commentary gets around to credit, debt and interest.  So I am not the one who relates all the economic problems to that trio.  it is the experts who do.  I just point out rarely does anyone note that the underlying ex nihilo credit is the problem, a problem made exponential by the interest charged on it.

Globalization is only the damage done by ex nihilo credit.  Some benefit, most suffer. It is facilitated by "free trade" agreements.  That is why they are so controversial

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Are Negative Interest Rates Debt Deflation?

I've repented of using the terms malcredit and benecredit, since modifying perfectly good words to account for degeneration cedes ground to the bad guys.  There are apples, and there are rotten apples. There is credit, and then there is ex nihilo credit.  Clear and simple.

Credit and debt necessarily balance out.  If I lend you $20, you owe me $20. Everbody does that.  It is not ex nihilo, cuz if I am not paid back, I've lost $20 in purchasing power.  This is private extension of credit, and there is a debt on the other side.

If I ship you $500 in goods at net 30, you owe me $500, and I have an accounts receivable, an asset, worth $500.  If you don't pay, I am out my income, and the books I sold you. This is commercial extension of credit, and there is a debt on the other side.

That's all just credit.  And debt. At no interest.  All good.

Now, sometimes, some people would extend their $20 at interest. In most of history, this was illegitimate, if not illegal, since lending any amount at any rate of interest for any duration causes damage.    People lending at interest had no recourse to courts for enforcement, any more than a casino operator can enforce gambling debts (hence extra-legal enforcement of gambling debts).

In any event, credit is good, but it can be abused by adding interest.

Now banks, where gold and silver were stored, at first could not lend out their stores, for example, it was illegal in ancient Rome.  In time things change, so just like I might lend you $20, a bank could too. OK, if the owner of the deposit agreed.

But the temptation to lend money out at interest is of course just too strong.  So that happened.   It distorts an economy, but that is not as bad as it can get.

Instead of releasing gold as a loan, the depositor could write a note stating the note-holder was as good as gold.  These notes could move around, the proto-currency.    Nothing wrong with that.  It's a loan, and there is an asset on the other side.  But of course it also could have interest attached.

One currency happened, bankers figured out they could write more currency than there was gold, initially a crime that carried the death penalty.  We call this fractional reserve banking now.   In the measure there is only a fraction of reserve backing loans, that measure is ex nihilo credit.  If your bank holds 100 pounds of gold, and you write 200 pounds in currency notes, then you have a 50% fractional reserve.  Of course this is fraud, and "bank runs" followed discovery.  If ruined depositors did not kill the bankers, it was only because he authorities hanged them first.

Things change.  It's quite common for what is criminal among citizens becomes de riguer for the Hegemon.  Now our entire banking system worldwide is built on fractional reserve, hard to say exactly, but best estimates is 3%.  97% ex nihilo. Fractional reserve is so dicey it is stupid without some insurance premium so to speak, and that is interest on the loans of the fractionally reserved credit.

So imagine that.  For the portion of the economy which depends on bank credit, some 97% is ex nihilo credit.  There is a debt on one side, but no asset underlying credit on the other side.

It sounds like there is.  Ford got credited ex nihilo for the Mustang of which title was transferred to you, upon your promise to make payments, in ex nihilo credit, plus interest, out of your income stream, largely tallied in ex nihilo credit.  Whole lotta ex nihilo credit going' round.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Before I explain what's wrong with that, let me translate the previous paragraph from reality to capitalism.

You get a loan from a bank for the money to buy a Ford Mustang. Ford gets that money for the Mustang and transfers title to you, upon your promise to make payments, in money, plus interest, out of your income stream.  Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments.  What's wrong with that?

Well, it's not money.  (But experience the social conditioning: the second version sounds correct, but it is utter fiction.) It's ex nihilo credit. It suggests a wealth that is not there, and people calculate economic decisions in prices, prices that are not denominated in money, but in ex nihilo credit.

Ex nihilo credit has no rational limit.  Ex nihilo credit appears to be wealth.  People who would not qualify for asset backed loans certainly qualify for ex nihilo credit.  They want more better cheaper faster, and as ex nihilo credit-based demand grows,  Ford can deliver, at least what is advertised as such.

What's wrong with that?  Well, as Bastiat noted, there is the seen and unseen.  We like what we see.  And as I note, we all love a system that works for us.

Ex nihilo credit is paid into the economy, causing inflation, and an appearance of wealth that is not there.  People overextend.

With false wealth, the most egregious borrowers are necessarily calling forth what array of goods and services we see.  The least perspicacious are the most powerful economic actors, given the leverage ex nihilo credit offers. A Dick Cheney tells us "deficits do not matter" (ex nihilo credit is also deficit spending) as he gleefully prosecutes criminal wars with impunity, and immunity.  The poorest person in USA can whip out his EBT card to pay for a couple of corn dogs and a supersized Coke at a gas station. There is no difference in kind between those two people, only in scale. Neither has any money.  Both are dependent on ex nihilo credit.  Both are economic actors. Both simply put their purchases on the tab denominated in ex nihilo credit.  It all adds to the power, denominated in ex nihilo credit tallies, of the bankers, etc.

Sure auto payment delinquencies are up, but only to 2.6%.  So what?

On the margin, much of the recent growth of auto sales has been attributable to sub-prime borrowers, which are now up to 31% of all loans. These loans carry onerous interest rates—often 20% or more—-and are available primarily due to junk debt financing of non-bank lenders. That is, fly-by-night start-ups organized by Wall Street and private equity funds.

What is unseen is what that 31% would be buying if they were not

A. using credit or money to buy a car (public transportation?  different car?)

B. forking over the 20% interest on their ex nihilo credit loan to the bankers.  We'll never know.  the only thing we do know, is they cannot afford to what they are "buying" with ex nihilo credit.

Their losses go on our tabs.  Recall it is ex nihilo credit, the banks are out nothing. The delinquent buyer may have a note on a credit score, but Ford has the $35,000 in ex nihilo credit on the books as an asset.  Where is the asset underlying the deal?  Why, the Mustang itself, right?  Well, it's been repo'd and sold for $20,000. That's a $15,000 difference.  Is the bank out?  No.....  Is Ford out?  No....  Is the borrower out?  No....  well, then who picks up the $15,000 loss?  If you cannot tell who is the mark in a poker game within the first 20 seconds, it's you.

Hi Ho Hi Ho, it's off to work you go...  You have to work to pay down the tab of everyone from Dick Cheney to the delinquent Mustang short-faller to the unemployed fellow dining on corn-syrup dogs and diabetes-bev at the Mini-mart.  That's capitalism.

What is unseen is what we would have without ex nihilo credit.  Less war?  Less surveillance?  Better medicine, education, clothing, food, housing?    More peace and prosperity?  History says yes, but we see the Mustang in the driveway and say "what's wrong with that?"

We all love a system that works for us. 150 years ago the English would look at the Irish for whom the system did not extend, dining on the 1850s version of corndog and coke, and say they are genetically inferior.   Today we look at those who do so and say the same things.

Ex nihilo credit distorts the array of goods and services we would reckon we could buy.

It retards true wealth creation by tapping into income streams with interest payments.

It concentrates wealth in ever fewer hands, by means of interest stream if no default, and titles returned to the lenders if default, who in turn then hold sway over those who borrowed ex nihilo credit (we've noted in your file), if not enslave them as with student loans.

What do we care?  We have big screen TV, KFC, Mustang, iPhone and a house.  And Romney/Obamacare.  And poverty draft.

Well, you might not care, but the 1% are sure worried.  There was no rational limit to lending ex nihilo credit at interest.  But something that defies understanding, never seen before in history, is happening.  An utterly irrational negative interest rate phenomenon.  With wealth tallied in ex nihilo credit, an undoing could result in all tallies being marked to market.  Pro rata?  Or politically distributed (OK, I know the answer.)  Or war?  If the 1% is worried, you should, because they decide.

Inflation comes from printing too much currency.  We have inflation in housing, medicine, education, some categories of food, and certainly equities.  So what happens when you "print too much credit," or more accurately too much ex nihilo credit?  That is the head scratcher.  Deflation?  We do see prices dropping in shipping, but that is overcapacity based on misallocation of resources and malinvestment due to reckoning prices in ex nihilo credit. Dropping prices is not necessarily deflation.

Perhaps deflation in relation to ex nihilo credit is not in the price of goods, but the price of debt.  The negative interest rates are showing up in bonds, in other words, debt.  So if we had hyperinflation of credit with ex nihilo incontinence, is the reverse hyper-deflation in debt?

Is negative 2/10th of 1% interest on a ten year bond an abberation, or just the beginning?  We can see various actors chafing with ten trillion at negative 2/10ths of 1%. Has anyone studied the impact of negative interest rates to 2%, 5, 10, 25%?    Is that the denouement?  Deflation in debt, the debt on the other side of the balance sheet for ex nihilo credit?

If the hegemon's power is tallied in ex nihilo credit-based debt (for the one who holds the paper is in control) the debt deflation means a commensurate loss of power.  Is that what is going on?  You tell me, I haven't figures it out yet.

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Best Economic Essay in Ten Years

What have I been saying?  After delineating good and bad credit, finally someone in academia is saying it!

Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.

Again and again I have pointed out the winners only had to be willing to take on the most debt.  I thought I was the only person pointing this out.  Comes now a couple of professors who explains well why if you have paycheck, property or pension, for the next forty years, you're toast.

That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

Some will argue, all those tellers and loan officers and Vice Presidents and janitors and rent-a-cops are certainly being paid wages generated and stockholders and Presidents get profits.  No.  They are just minion-rentiers who are tossed some redirected revenues for making actual the redirection in toto.

Here is an important point, upon which I will intrude...

Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income.

How is this distribution of wealth effected?  Titles.  Ex nihilo credit is available to borrowers from hegemon-chartered entities.  People who are wholly engaged in loaning credit, something from nothing, are able to attach at least a partial lien, if not a clear title, to at least a portion if the means of production and real wealth such as homes.  A slice here, a chunk there, it can add up.  Their slice is purely inflation, but since all loan-involved investments are marginal, and the lender's title is superior, when the economic actor is overwhelmed in his measure, all spoils go to the lender.  It is a neat trick.  Wait a minute.  It is just the pigeon drop scam!

What you don't know at this point is that your new acquaintances are running a scam, and you're the target. The first stranger earned your confidence, so that when the second stranger presented a moneymaking opportunity, you had someone you trusted telling you that it was a good idea. The first tip-off to the pigeon drop, then, is when you find yourself with a new friend, followed soon after by a chance for the two of you to cash in with the help of a third person.

Your new acquaintance is a real estate broker who instills the confidence, and the second stranger is the banker, who can make a money maker happen, a home (or a job ((a degree)) or a car...  you name it.)  It's the same set up over and over, but it is legal.  There is nothing in the bag of value, except what money or title obligations you put in.  Later, you realize you got nothing, they got the titles.  Titles to your future income stream. Except no one hides this, because it is enforced by law.

For example, in one instance, as homes are sold and debt is assigned, who has the title to the goods?  Well, you, as long as you can make payments and pay taxes. But one gross distortion is since the 1980s in USA you cannot get a mortgage without very special circumstances (maybe farmland).  Now you get a deed of trust, which allows banks to fast track foreclose, so they can get the home resold faster.

Onward,

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14)

Yes, a specialty retailer who had a storied life was closing down and lamented we lost two, maybe three generations of entrepreneurs.  They went instead for the skim.  After noting a business loan is paid for out of the proceeds from the new means of production created, home loans must be paid out of the current income of the borrower.  The house itself provides no income.

Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. 

Everything changed in the 1970s.  When Nixon took us off the gold standard (lite).

Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.

Any real estate agent in the 1990s could have told you that if you could afford a $200,000 house at 9% interest, you can afford a $300,000 house a 6% interest.  Academics figured this out only in 2014? So, when the interest rates dropped from 9% to 6% did people trade up to more or better homes?  No way.  A $200,000 house at 9% interest becomes a $300,000 house at 6% interest.  Imagine how overpriced the homes people are getting now at 4%.  That $200,000 house is now priced at $600,000.  If and when the economy crashes, wages, income, etc goes back to at least lower, one way or another.  But the nominal debt stays at $600,000.  Because of your marginal exposure, Warren Buffett picks it up for pennies of ex nihilo credit on the dollar for Berkshire Hathaway, and you must at best bankrupt your "loss."

How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”

Yes.  Good question.  And the follow-up question would be, to whom does it go?  The answer will be, the 1%.

To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.

He is hitting on something here... credit inflation, debt deflation.  Two sides of the same coin? I'll have to turn that over in my mind.  And this is good stuff:

A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.
But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.

And this...  well, it also constrains the creation of means of production the would generate a surplus from what it produces.  What cannot go on will end at some point.

This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Now this needs a bit of explication.

Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.

Things were very different then. Home loans were for mortgages, not deeds of trust, financed largely by Savings and Loans and Credit Unions in which the interest rate, about the same today, 4.75%. in 1955, barely covered the costs of administration of the loan.  The loan was against money,  the cash in the pay envelope deposited on the first Friday of the month into the S&L or CU, backed by gold and silver.  And the loan terms were usually 20 years, because that is all it took to comfortably pay off a note.  There was no Freddie Mac to create inflation by vacuuming up as much paper as anyone could generate.  That would not come until... wait for it... the 1970s.  But there were assumable loans, meaning instead of flipping homes and inflating values, I might get a job offer in another town and just pass my mortgage onto someone else who continued the payments.  The S&L just wanted its money back, could care less from whom.  So yes real estate markets can grow sustainably, but nothing we have today resembles when last we had a sustainable market.

And this too:

Many U.S. students could not attain a college degree without student loans.

 Not true, false dilemma. The fact is EZCredit is merely more attractive, buy-now pay-later, than a pay-as-you-go degree, granted that ex nihilo credit woefully overpriced an ever degraded degree.

In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. 

OK, useful figure, let's call it the 5 point growth.  That 5 point growth generated, as this essay demonstrates, a false economy, unreal GDP proportion reported as GDP. So then we must ask, what per cent of 5 point growth is of the distortion of reported GDP, generated by financial engineering?  And better yet, net of false economy FIRE financial engineering portion, to what does the "7.9% of GDP" truly amount?

This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?

As for today's economies, the question is moot.  Retirees are being "sicked-in" to hospices, shaken down for all of their assets, and dispatched at necessary rates to help maintain balance.  So the question is not vital for today, today's retirees are being queue'd up for extinction in this Darwinist polity.  The question is vital to whomever makes it through the progressing disintegration.

Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.

Yes, as I have been saying here, when we switched from vendor-financing for industry and commerce to bank finance starting in the 1970s, that which was near impossible to tax for the impracticality of it, such diffuse records, now became easy to tax with ex nihilo credit ascendency since the records could be found in one place: banks.

That this was a conscious agenda item is revealed in the fact when the FED was first set up back in 1913, the FED engaged in an intensive campaign for business to switch from vendor financing to Trade Acceptances ostensibly to improve commercial efficiency.  "Let the banks process your receivables for you."  It did not work, USA business did not fall for that ruse.  But with ex nihilo credit after 1971, it worked like a dream. No a ten cent retail purchase can be tracked and taxed.

Here again, as perspicacious as this essay is, it is prolegomenous.  It will be interesting to know what the prescriptions are, just how to save the Hegemon's system from its greediest outliers?  Sure, whoever borrowed the most won for a while, but not any more.  They are dropping like flies.  Now let's discover what the sustainable limits are in the pigreon drop scam.

It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. 

Yes, to what I have referred here elsewhere on the blog as "exceptional wealth."  the 1% did not earn their exceptional wealth, in a free market.  They stole it fair an square, legitimately.

Should it be redistributed?  No way!  Simply delegitimize charging interest, that is deregulate finance at least as far as making interest a non-enforceable contract item, just as gambling debts are non-enforceable in USA, and watch the "wealth" first deflate as it is marked to market, and then redistribute perfectly as the accumulators lose the wherewithal to ever corrupt more and more players: economists, politicians, professors, Wall Street actors, industry, religion, law, ad nauseum.  Delegitimize and redistribution happens automatically and fairly.  Will capital fly?  Sure, when it is that light, ligher than air, mere notional, it sure will.  But where?  "I have $10 billion tallied in ex nihilo credit obligations due me, will you give me refuge in Switzerland?"  "Convert it to gold first, then show up in our airport.  Good luck."  Good luck indeed getting away from the Hegemon with that.

Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.

A good portion of it forfeited to the state, hence its recurrence.  The Hegemon could care less if this is unwound rationally, fairly peacefully, or if there is a world war.  Note when the Soviet empire crashed, existentially ended, all of the previous players remained at the top. The gentle unwinding process of eliminating the legitimization of interest (for without it ex nihilo credit will disappear too) would be acceptable to the hegemon, just as the surprise insurgency of a Donald Trump is acceptable (and the moment he is not acceptable, he'll get a serious headache, like a Kennedy).

The summary is excellent, I recommend highly clicking on the link up top and reading the whole thing.

Somehow, I haven't figured it out yet, and apparently no one else has either, if ex nihilo credit and negative interest rates are correlated, and the significance thereof.  There may be a clue in ex nihilo credit inflation/price deflation. I dunno. Whoever figures this out will be so far ahead of everyone else.

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