La economía usana es un puñetero ponzi
The Rot Within, Part I: Our Ponzi Economy
charles hugh smith-The Rot Within, Part I: Our Ponzi Economy
Depending on blowing the next bubble to temporarily prop up the economy is the height of foolhardy shortsightedness.
All the conventional policy fixes proposed by Demopublican politicos, technocrats and the vast army of academic/think-tank apparatchiks are the equivalent of slapping a coat of paint on a fragile facade riddled with dryrot.
All these fake-fixes share a few key characteristics:
1. They focus on effects and symptoms rather than address the underlying causes, i.e. the dryrot at the heart of our government, society and economy.
2. They maintain and protect the Status Quo Powers That Be--no vested interests, protected fiefdoms or Financial Elites ever lose power as a result of these policy tweaks.
3. They are politically expedient, meaning they assuage the demands of vested interests rather than tackle the rot undermining the nation.
4. They ignore the perverse incentives built into current systems and the incentives of complicity, i.e. to cheer another coat of paint on the dryrot rather than face the costs of real reform.
The financial underpinnings of the economy and society are rotting from within: finance, higher education, defense, healthcare, law, governance, you name it.
This week I want to highlight a few key causes of this pervasive and eventually fatal systemic rot.
Let's start with Our Ponzi Economy.
There are three primary examples of our Ponzi Economy: pay-as-you-go social programs (Social Security, Medicare, Medicaid, etc.); housing and the stock market. All are examples of financial Ponzi schemes.
All Ponzi schemes rely on an ever-expanding pool of greater fools who buy into the scheme and pay the interest/gains due the previous pool of greater fools. Ponzi schemes fail because the pool of greater fools is finite, but the scheme demands an ever-expanding pool of participants to function.
All Ponzi schemes eventually fail, though each is declared financially sound because this time it's different. The number of greater fools required to keep the scheme going eventually exceeds the working population of the nation.
Here's why Pay-As-You-Go Social Programs are all Ponzi schemes:
1 retiree consumes the taxes paid by 5 workers.
Those 5 workers when they retire consume the taxes paid by 25 workers.
Those 25 workers when they retire consume the taxes paid by 125 workers.
Those 125 workers when they retire consume the taxes paid by 625 workers.
Those 625 workers when they retire consume the taxes paid by 3,125 workers.
You see where this goes: very quickly, the number of workers required to keep the Ponzi scheme afloat exceeds the entire workforce.
The only way to keep the Ponzi scheme going is to keep raising payroll taxes on the remaining workers, which is precisely what welfare states (i.e. every developed economy on the planet) has done.
But raising taxes merely extends the Ponzi scheme one cycle. Eventually, taxes are so high that the remaining workers are impoverished. Right now, the U.S. has reached a ratio of 2 full-time workers for every retiree. As the number of retirees rises by thousands every day and the number of full-time jobs stagnates, the ratio will slide toward 1-to-1:
Estimates are even worse in other developed nations. In Europe, the ratio of retirees over 65 to those between 20 and 64 will soon reach 50%--and that's of the population, not of people with full-time jobs paying taxes to fund social welfare programs. (source: Foreign Affairs, July/August 2014, page 130)
As the percentage of the working-age populace with full-time jobs declines, the worker-retiree ratio will become increasingly unsustainable. The taxes paid by each worker are nowhere enough to fund the generous pension and healthcare benefits promised to every retiree.
In the U.S., the number of people of working age who are jobless is 92 million; the number of full-time jobs is 118 million. This chart of labor participation includes almost 30 million part-time employees who don't earn enough to pay substantial taxes and millions of self-employed people making poverty-level net incomes.
Courtesy of STA Wealth Management, here is a chart that shows full-time workers are less than half the labor force:
Housing is also a classic Ponzi scheme: prices can only go up if there is an ever-expanding pool of greater fools willing and able to pay even more for a house than the previous pool of greater fools.
As I have explained many times, the only way the Status Quo has been able to expand the pool of greater fools is to lower interest rates to near-zero, drop down payments to 3% and loosen previously-prudent lending standards.
The Housing "Recovery" in Four Charts (May 27, 2014)
These tricks extend the Ponzi for a cycle by artifically expanding the pool of greater fools, but that pool is not infinite. (Foreign buyers are currently enlarging the pool, but their participation is dependent on the Ponzi schemes in their home economies not blowing up.)
The stock market has been made the official metric of the nation's economic health; too bad it's a Ponzi scheme. Financial bubbles are what economist Robert Shiller calls "naturally occurring Ponzis" because the psychology of ever-rising prices and profits fuels an inflow of greater fools that sustains the bubble until all available greater fools have sunk their cash and credit into the bubble.
Here is what a market that is increasingly dominated by Ponzi bubbles looks like: this is the S&P 500 (SPX):
(source: relleniton T. Long, Macro Analytics)
Depending on blowing the next bubble to temporarily prop up the economy is the height of foolhardy shortsightedness. Yet that's our Status Quo, increasingly dependent on inflating bubbles to evince "economic strength" when the Ponzi paint will soon peel off the rotten wood of the real economy
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The Rot Within, Part II: Inflation Is Not "Growth"
charles hugh smith-The Rot Within, Part II: Inflation Is Not "Growth"
Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more.
The official policy of the Central Bank (Federal Reserve)/government is: inflation is necessary for "growth," i.e. economic expansion. The unstated reason for this official support of inflation is that it's easier for borrowers to service their debts as their income inflates.
To take an extreme example: let's say a homeowner has a mortgage of $100,000, an annual wage of $40,000 and annual mortgage payments of $10,000. At 100% annual inflation in both prices and wages, the home mortgage remains fixed at $100,000, the payment remains fixed at $10,000 but his earnings double to $80,000.
Where the mortgage payment initially took 25% of his earnings, now it only takes 12.5%. Yippee Skippy, the homeowner has an "extra" 12.5% of his earnings to support more consumption and debt: thanks to inflation, the homeowner can now buy a car on credit and use the "extra" 12.5% of earnings to pay the auto loan.
Central banks around the world seek inflation for another reason: the Keynesian Cargo Cult that dominates all central banks and governments believes with quasi-religious certainty that people respond to inflation by buying more stuff now rather than later: since prices will rise in the future, it makes sense to buy stuff now at "lower prices compared to next year's prices."
This is called bringing demand forward, as the demand to buy stuff is shifted from the future to the present.
In an economy dependent on debt-based consumption, inflation is absolutely essential to reduce the real costs of servicing old debts so households can afford to buy more stuff on credit. This is the basis of the Fed's insistence that inflation is equivalent to "growth"--inflation enables households to continue adding more debt to buy more stuff, as long as earnings inflate along with prices.
There are three problems with the Fed's "inflation is growth" scenario:
1. Earned income (wages and salaries) don't inflate along with prices
2. Rising inflation and low interest rates crimp lender profits and increase risks
3. Bringing demand forward exhausts households' ability to fund additional consumption with debt.
To date, all the Fed's efforts to generate inflation have bypassed earned income: wages and salaries have declined when adjusted for inflation. Hourly wages: stagnant since 2008.
source: Rising Wages Where? Real Wages Post First Annual Decline Since 2012
Real household income has declined across the entire income spectrum:
Here's the same data in chart form, courtesy of Doug Short:
Deduct healthcare expenses and debt service, and what's left of wages for the rest of life's expenses is tanking: Courtesy of longtime correspondent B.C.:
Debating the real rate of inflation has become a financial parlor game because the real rate of inflation depends on the household's demographics, locale, expenses and income. Anyone paying the unsubsidized costs of healthcare or college tuition is experiencing crushing inflation (i.e. loss of purchasing power), while the low-income or retiree household receiving federal subsidies (i.e. no exposure to the real costs of higher education and healthcare) experiences low inflation.
But even the official measures of inflation reflect the destruction of purchasing power wrought by supposedly low inflation when wages are stagnant while costs keep rising:
source: What Inflation Means to You: Inside the Consumer Price Index (Doug Short)
Inflation: A Six-Month X-Ray View (Doug Short)
Fed policies have inflated asset prices but left earned income in the ditch. Please read How Effective Have The Fed's QE Programs Been? (STA Wealth Management) for a fuller understanding of the perverse consequences of the Fed's "inflation is growth" policies.
Though nobody in official circles dares discuss it, the reality is inflation coupled with low interest rates reduces lenders' profit margins and increases systemic risk. In an economy in which wages are stagnating or declining in real terms while major expenses are galloping ever higher, the only way lenders can expand borrowing is to lend to marginal borrowers--households who would not qualify for loans under prudent risk management.
For evidence of this, we need only look at the explosive rise in subprime auto loans and higher-education student loans: In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates (New York Times)
Lastly, there are limits on how much future demand can be brought forward when wages are declining. The Keynesian Cargo Cult has absolute faith in the notion that consumers faced with inflation will buy more today rather than pay more next year.
But the facts do not support the Keynesian Cargo Cult's misplaced faith. In Japan, where the central bank and government have struggled for years to generate price inflation as the means to "re-start growth," wages have fallen by 9% in real terms since 1997. (source: Voodoo Abenomics: Japan's Failed Comeback Plan Foreign Affairs)
When prices rise faster than incomes, people can't afford to buy as much. So consumption necessarily declines as prices go up and purchasing power goes down. There is nothing mysterious about this, but the Keynesian Cargo Cult is unmoved by mere fact and common sense.
Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more. Prices don't just rise for consumers; they rise for producers and employers as well. Every tick up in healthcare costs and producer costs increases the need for businesses to slash the one large expense they still control: payroll.
We all see the desperate gimmicks corporations are deploying to lower costs while keeping prices the same: reducing package sizes, putting less product in each package, selling "individual servings" at higher cost per ounce, lowering quality of the product, using more fillers, and so on.
The ultimate hubris of the Keynesian Cargo Cult (which includes the global economy's central banks) is the naive notion that they can manipulate an entire system with a few levers such that the desired outcome--and only the desired outcome--is the output.
The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts
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The Rot Within, Part III: Our Political Order Is Defined by Favoritism and Extortion
What's the difference between the U.S. Congress and corrupt petty officials taking bribes at a Third-World border crossing? Only one of scale.
Corruption ceases to be corruption when it becomes the Status Quo; what was once recognized as corruption is seen as just another cost of doing business. Our political order is structurally corrupt: the key dynamic in every level of governance is favoritism and extortion.
Favors must be bought: those foolish enough not to spend freely on lobbyists and campaign contributions find their competitors have gained the upper hand by buying favors such as tax breaks, federal subsidies, no-bid contracts, cost-plus contracts, backroom deals, regulations that exclude competition and so on.
Politicos must extort campaign contributions from the maximum number of supplicants seeking favors to maintain their perquisites and power.
Here's how the system works.
There was much mainstream media hand-wringing and outrage in response to corporations moving their place of business offshore to lower their taxes. This outrage is completely misplaced--and indeed, seems designed to misdirect attention away from the systemic corruption that is the beating heart of the American political order.
Let me explain how favoritism becomes the Status Quo. There are two key dynamics at work.
1. Onerous, uncompetitive taxes and/or regulations. The U.S. corporate tax rate is 35%, the highest in the world, and various observers estimate the average state corporate tax tacks on another 4.1% for a total corporate tax rate of 39.1%.
This is roughly three or four times the nominal and effective corporate tax rates in competing nations.
The heavier and more asymmetrical the burden, the greater the incentive to find a way to lighten the load. This is why nations with asymmetrical tax rates and collection practices are inevitably hotbeds of black market activity, as those few chumps who actually pay the official tax rate go out of business or struggle to make ends meet while their black market competitors are living high on the hog.
The injustice of such a system fuels the need and desire to buy favors to escape the burden that virtually nobody actually pays.
2. Once a significant percentage of participants have eased their burden by buying political favors, everyone else is forced to wonder why they should continue paying the high taxes when others are avoiding them.
This system is not accidental. The asymmetry feeds the need to buy political favors, and is thus a form of systemic extortion. If you refuse to pay the bribe at a Third-World border crossing, the Powers That Be will make sure your life becomes increasingly perversos; while those who ponied up the bribe breeze through the paperwork, you wait and wait and wait, and are told to fill out more paperwork.
In precisely the same fashion, those who refuse to bribe legislators and key political players find their tax rates are crushing and life is perversos indeed. This is known as pay to play, and it defines the U.S. political order.
Those who don't pay the extortion to congresspeople and lobbyists are punished by a system designed to force every participant to pony up the bribe or suffer the consequences.
In other words, U.S. corporate taxes are extortionist and unfairly applied by design, to guarantee every corporation has to buy favors from politicos intent on stripmining billions of dollars in pay to play "contributions."
I know many people feel corporations should pay high taxes because they did so in the 1950s, but this historical precedent is blind to the realities of a global economy. Given global sales and workforces, why should a company headquartered in the U.S. pay punishing U.S. tax rates on its global operations?
Is it good policy to burden our corporations with absurdly complex tax codes and rates so far above global norms that every U.S.-based company is forced to seek tax avoidance schemes just to remain competitive and meet shareholder demands to be as profitable as others in the same global space?
It's easy for pundits protected by academic tenure to criticize corporate management, but put yourself in the shoes of a pension fund that owns stock in a company that actually paid the full 35% while competitors used strategies bought by political favors to eliminate that burden: your dividends and capital gains would be significantly lower as a result of the corporation's refusal to use pay to play tax avoidance strategies.
The reality is the pension fund manager and the corporate managers would both be fired for underperformance if they were stupid enough to pay the full corporate tax rate or insist on the company doing so.
We have a double standard: as individuals, we seek every possible avenue to escape high Federal taxes, and the wealthier you are, the more avenues are open due to favors bought from an always willing to wheel-and-deal Congress.
Yet we publicly demand corporations pay absurdly asymmetric tax rates to qualify as "good corporate citizens."
Corporations don't exist to be good citizens. As noted above, anyone clueless enough to pay the 35% federal tax rate on all net earnings will have failed the shareholders, who naturally demand the same payout in dividends and capital gains as those earned by competitors who paid to play and avoided most or all U.S. taxes.
Systems of good governance make exceptions and favors difficult to gain and the process transparent.
Corrupt governance makes exceptions and favoritism the unspoken rule and the process of buying them ****** from public view. That defines the U.S. political order perfectly.
Soaring corporate profits make juicy targets for taxes:
Soaring profits are the engine of a rising stock market:
Wages have stagnated while profits have soared:
It's easy to see why people want to tax corporations heavily, but in thinking this they are playing right into the extortionist/pay to play political order.
A fairer, good-governance system would lower corporate tax rates to the equivalent of an excise tax and exclude favors and exemptions. A corporate tax rate of 5% that was applied to all corporate sales and earnings in the U.S. regardless of where the company was nominally based would raise more money than the current corrupt system in which many corporations pay almost nothing and chumps who failed to pay the required bribes pay a globally asymmetric rate as punishment for their failure to 'contribute" to the campaigns of incumbents.
A low, evenly applied corporate tax rate would destroy the pay to play system of extortion/bribery, and as a result it will never be adopted. The U.S. political order is systemically corrupt and is incapable of self-reform. The rot has seeped into every nook and cranny of the political order, to the point that it's now accepted as "the way we do business here."
What's the difference between the U.S. Congress and corrupt petty officials taking bribes at a Third-World border crossing? Only one of scale. The corrupt petty officials can only look with envy on the Congressional extortion machine