Sunday, October 15, 2017

The Fading Scent of the American Dream

The theme this week is The Rot Within.
It's been 10 years since I devoted a week to the theme of The Rot Within(September 17, 2007). Back in 2007, I listed 16 systemic sources of rot in our society, politics and economy; none have been fixed. Instead, the gaping holes have been filled with Play-Do and hastily painted to create the illusion of shiny solidity.
We live in a simulacrum society in which the fading scent of the American Dream is more a collective memory kept alive for political purposes than a reality. Even more disturbing, the difference between a phantom prosperity (or in homage to the Blade Runner film series, shall we say a replicant prosperity?) and real prosperity has been blurred by layers of simulated signals of prosperity and subtexts that are carefully designed to harken back to a long-gone authentic prosperity.
This is the reality: the American Dream is now reserved for the top 0.5%, with some phantom shreds falling to the top 5% who are tasked with generating a credible illusion of prosperity for the bottom 95%. While questions about who is a replicant and who is real become increasingly difficult to answer in the films, the question about who still has access to the American Dream is starkly answered by this disturbing chart:
If you talk to young people struggling to make ends meet and raise children, and read articles about retirees who can't afford to retire, you can't help but detect the fading scent of a prosperity that has steadily been lost to stagnation, under-reported inflation and soaring inequality, a substitution of illusion for reality bolstered by the systemic corruption of authentic measures of prosperity and well-being.
In other words, the American-Dream idea that life should get easier and more prosperous as the natural course of progress is still embedded in our collective memory, even though the collective reality has changed: for the bottom 95%, life is typically getting harder and less prosperous as the cost of living rises, wages are stagnant and the demands on workers increase.
Meanwhile, the asset bubbles inflated by central banks have enriched the top 10% of households, which own over 75% of all assets and take home over 50% of all household income.
"While most Americans are unprepared for retirement, rich older people are doing better than ever. Among people older than 65, the wealthiest 20 percent own virtually all of the nation’s $25 trillion in retirement accounts, according to the Economic Policy Institute."
Household wealth follows a power-law distribution, i.e. the vast majority is held by the top few households: the top .1% own roughly 25% of all US household wealth, the top 1% around 40%, and so on. So the households between 80% and and 95% own a very modest percentage of what the top 96%-99% own.
The power-law distribution of wealth is visible in this chart:
Statistically, average per capita (per person) income and per capita share of GDP have risen substantially over the past the past 30 years. By these measures, everyone is considerably better off. Yet how many households are measurably better off in terms of free time, savings, disposable income, retirement accounts, financial security, reduction in debt loads, etc.?
These two charts tell the real story of our economy: median household income (using the Consumer Price Index measure of inflation, which grossly under-estimates real inflation, as I explained in About Those "Hedonic Adjustments" to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service) has gone nowhere since 2000. If income were adjusted by real inflation, the chart would show a 20% decline in purchasing power for all but the top 5%:
This chart of household assets/corporate equities reveals the source of the phantom wealth propping up our simulacrum prosperity:
And please don't claim corporate profits are soaring, so the valuations are justified. If you examine the Federal Reserve's Z1 report, you'll find that corporate profits are unchanged since 2014--no growth at all.
Clearly, our political-financial system and the policies of central banks have combined to concentrate wealth and income in the top of the wealth/income pyramid: those who own the assets that have bubbled higher are booking luxury cruises, while those who don't own much of bubbling-ever-higher assets are working at tourist spots visited by the cruise ships.
The average person knows the scent of the American Dream is fading, and many have lost hope of what was once taken for granted: home ownership, increasing income, and an easier life as household income and wealth slowly but surely increased with time.
But the collective memory of the American Dream remains; people feel they should be able to take a vacation, should be able to buy a starter home, should be free of constant worry about paying the bills, and so on. With this collective memory still in place (and constantly kept alive by advertising), people naturally start feeling a pervasive sense of betrayal: the system implicitly promised everyone who worked a lifetime security and increasing prosperity.
Official claims of prosperity are out of alignment with reality, and so expectations are out of alignment with reality. As I have often noted, this creates a highly combustible and dangerous dynamic, as the emotions of betrayal and despair are volatile.
In other words, if 90% of the work force expects to be poor their entire lives, has no thought of ever owning a house, anticipates scraping by in their senior years, etc., then their expectations are aligned with the realities of a hierarchical power-law economy and social structure. Low expectations are difficult to dash.
But when 90% of the work force has expectations for an American Dream based on memories of those expectations being met, the widening gap between expectations and reality unleashes a politically combustible realization that prosperity is now concentrated in the hands of the top 5%. A sense of injustice and betrayal arise, along with a sense that something has gone profoundly wrong with the society and the economy.
This dynamic has yet to fully play out, but it will. Whatever you think of Trump, his election isn't the problem; it's merely a symptom of much deeper forces that will sweep our corrupt and rotten-to-the-core status quo into the dustbin of history.


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Friday, October 13, 2017

The Endgame of Financialization: Stealth Nationalization

This is the new model of nationalization: central banks control the valuation of private-sector assets without actually having to own them lock, stock and barrel.
As you no doubt know, central banks don't actually print money and toss it out of helicopters; they create a digital liability and use this new currency to buy assets such as bonds and stocks. Central banks have found that they can take control of the stock and bond markets by buying up as much as these markets as is necessary to force price and yield to do the central banks' bidding.
Central Banks Have Purchased $2 Trillion In Assets In 2017. This increases their combined asset purchases above $15 trillion. A trillion here, a trillion there, and pretty soon you're talking real money--especially if you add in assets purchased by sovereign wealth funds, dark pools acting on behalf of monetary authorities, etc.
Gordon Long and I discuss this stealth nationalization in our latest video program, The Results of Financialization: "Nationalization" (35 min):
In the old model of nationalization, governments expropriated/seized privately owned assets lock, stock and barrel. When a central state nationalized an enterprise, it took total ownership of the asset.
In today's globalized financial world, such crude expropriation is avoided for two reasons:
1. The entire point of the dominant neoliberal / neofeudal /neocolonial model is to maintain private ownership as a means of transferring the wealth to the New Aristocracy, i.e. the financier class. Government ownership certainly conveys benefits to the some are more equal than others functionaries atop the state's wealth-power pyramid, but it doesn't transfer the assets' income streams to private hands.
2. It sends the wrong message: central banks want private investors to do their bidding, i.e. to go along with the transfer of wealth and income from the many to the few (the New Aristocracy). Maintaining the system of private ownership enables the central banks to control the markets for these assets at the modest cost of a few handfuls of the loot being distributed to the small-fry owners of IRAs, 401K retirement accounts, etc.
In other words, what central banks want is not outright ownership, which is costly and troublesome; what central banks want is to control the markets on the cheap, with leveraged buying. In effect, central banks have been able to manage assets worth $150 trillion with a mere $15 trillion in well-timed (and loudly announced) asset purchases.
This is the new model of nationalization: central banks control the valuation of private-sector assets without actually having to own them lock, stock and barrel. Being the buyer of last resort--the Plunge Protection Team that buys every dip in whatever size is needed to stabilize valuations and then reverse the downturn into yet another rally to new highs--has worked for nine long years.
This success has bred a complacent faith in the central bank cargo-cult that there is no limit to central bank control of yields, valuations and market sentiment.
But as I've described here many times, financialization is a box canyon. Once you start down the path to the Dark Side of phantom wealth created by commoditized debt and leverage (i.e. financialization), there's no turning back to the real world.
The central bank aircraft is flying into a canyon with walls 2,000 feet high at an altitude of 300 feet. Everything seems to be going splendidly until the central bank aircraft rounds a bend in the canyon and discovers the canyon ends in a rock face 2,000 high.
In a desperate attempt to escape the box canyon, central banks will ramp up their assets purchases of bonds to keep yields near zero, and of stocks to keep the bubble valuations high enough to support all the debt and leverage that's been piled on the underlying collateral of the stock market: non-phantom net earnings.
Needless to say, attempting to control global markets via the issuance of trillions in new currency and using that currency to buy huge chunks of the stock and bond markets is an unprecedented experiment.
To continue the box canyon analogy: central bankers and their cargo-cult faithful are confident central banks are flying an F-18 with afterburners on max; climbing 1,700 feet in a near-vertical ascent should be no problem.
Those of us outside the cargo cult see the central bankers flying a Wright Flyer: innovative in its time, but inadequate to the task of controlling private-sector markets via stealth nationalization.


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Thursday, October 12, 2017

Are You Better Off Than You Were 17 Years Ago?

We tend to measure what's easily measured (and supports the status quo) and ignore what isn't easily measured (and calls the status quo into question).
If we use gross domestic product (GDP) as a broad measure of prosperity, we are 160% better off than we were in 1980 and 35% better off than we were in 2000. Other common metrics such as per capita (per person) income and total household wealth reflect similarly hefty gains.
But are we really 35% better off than we were 17 years ago, or 160% better off than we were 37 years ago? Or do these statistics mask a pervasive erosion in our well-being? As I explained in my book Why Our Status Quo Failed and Is Beyond Reformwe optimize what we measure, meaning that once a metric and benchmark have been selected as meaningful, we strive to manage that metric to get the desired result.
Optimizing what we measure has all sorts of perverse consequences. If we define "winning the war" by counting dead bodies, then the dead bodies pile up like cordwood. If we define "health" as low cholesterol levels, then we pass statins out like candy. If test scores define "a good education," then we teach to the tests.
We tend to measure what's easily measured (and supports the status quo) and ignore what isn't easily measured (and calls the status quo into question). So we measure GDP, household wealth, median incomes, longevity, the number of students graduating with college diplomas, and so on, because all of these metrics are straightforward.
We don't measure well-being, our sense of security, our faith in a better future (i.e. hope), experiential knowledge that's relevant to adapting to fast-changing circumstances, the social cohesion of our communities and similar difficult-to-quantify relationships.
Relationships, well-being and internal states of awareness are not units of measurement. While GDP has soared since 1980, many people feel that life has become much worse, not much better: many people feel less financially secure, more pressured at work, more stressed by not-enough-time-in-the-day, less healthy and less wealthy, regardless of their dollar-denominated "wealth."
Many people recall that a single paycheck could support an entire household in 1980, something that is no longer true for all but the most highly paid workers who also live in locales with a modest cost of living.
As noted in yesterday's postAbout Those "Hedonic Adjustments" to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service, the quality of our products and services has declined dramatically, even as prices continue marching higher.
Meanwhile, inequality and officially protected privilege has soared, as I outline in my book Inequality and the Collapse of Privilege.
The gulf between these two narratives--the ever-higher financial statistics, and our unsettling sense that we're less secure, less healthy and less wealthy--is widening. I think the Grand Canyon is an accurate metaphor here: the mainstream media parrots glowing official statistics on the distant side of the canyon, while on the lived-in-world side, well-being continues decaying.


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Tuesday, October 10, 2017

About Those "Hedonic Adjustments" to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service

The quality, durability, utility and enjoyment-of-use of our products and services has been plummeting for years.
One of the more mysterious aspects of the official inflation rate is the hedonic quality adjustments that the Bureau of Labor Statistics makes to the components of the Consumer Price Index (CPI).
The basic idea is that when innovations improve the utility (and pleasure derived from) a product, the price is adjusted to reflect this improvement.
So if television screens become larger, while the price per TV remains the same, the hedonic quality adjustment adjusts the price down when calculating the CPI.
In other words, since we're getting more for our money--more quality, more features, more goodies, more pleasure--the price is adjusted down to reflect this. If a TV that cost $250 had a 19-inch screen in the old days, and now a $250 TV has a 27-inch screen, the price of TVs in the CPI is adjusted down to reflect this increase in what the consumer is getting for her $250.
So while a TV still costs $250 to the consumer, in terms of measuring inflation the TV is reckoned to cost (for example) $225, as the consumer is getting a larger screen for her $250.
In other words, the price of TVs declines when measuring for inflation, even if the retail price remains unchanged. This is how the official rate of inflation can be so low even as real-world costs keep rising.
If you read the above link, you'll find the mathematical model used to reduce the price of products when calculating the CPI, i.e. the rate of inflation.
While the BLS website makes mention of the possibility that hedonic quality adjustments occasionally go the other way, i.e. quality has declined, it's clear this almost never happens. "Innovations" are always improvements.
I propose we start tracking anhedonic quality adjustments, i.e. significant declines in quality, durability, utility and the pleasure derived from the product or service. (Anhedonia: inability to experience pleasure from activities usually found enjoyable.)
First up: airline travel. Can any remotely objective passenger claim that airline travel is now more pleasurable than it was in the past, and that the quality of the product and service has increased due to "innovations"?
We all know virtually every aspect of air travel has declined other than the reliability of the aircraft--and due to tight schedules, just-in-time inventorying of spare parts and lack of redundancy (i.e. spare aircraft), even minor maintenance issues now routinely trigger flight delays.
Have typical airline seats become larger and more comfortable? You're joking, right? Seats have been shrinking even as the average girth of the passengers has increased.
First class seats may have become more luxe, but so have the fares.
As for hedonic experiences such as pillows, blankets, meals--welcome to Anhedonia. The industry is shifting to an everything now costs extra model: printing a boarding pass, speaking with a sales rep on the phone, carry-on luggage, etc.--everything carries an additional fee.
Changing a flight reservation can cost more than the initial price of the ticket.
And this is not even considering the entire air travel experience at airports.
Any fair anhedonic quality adjustment to air travel would double the CPI cost of a $300 ticket to $600 to reflect the staggering decline in quality, service and enjoyment.
Let's next consider computers. While the BLS is busy lowering the CPI price of computers due to faster processors, more memory, etc., the degradation of the utility of computers and enjoyment (i.e. ease of use) is ignored.
Consider the "innovation" of Windows 10, Microsoft's replacement of the Windows 7 workhorse operating system. Anyone else getting Win10 error messages demanding that I manually upgrade the BIOS on my laptop in order to get the latest upgrade? No instructions on how to do so are provided by Microsoft, of course.
To the best of my knowledge, Skype and Windows 10 remain incompatible in a variety of subtle and mysterious ways. Microsoft owns Skype, so welcome to Anhedonia. Please don't tell me the sudden failure of Skype on Win10 machines isn't a reality; we've given up even trying.
Then there's the decline in durability, not just in computers but in everything.Brand-new Corporate America appliances are rusting along the bottom within a year, almost-new U.S. branded ovens turn on by themselves, and the repair of the defective sensor costs more than the entire stove/oven itself--I could go on and on, but you have your own stories of devices and appliances failing or corroding in a few short years.
Water heaters once typically lasted 30 to 40 years. Now we're lucky if they last a decade.
The actual utility of "innovations" is also suspect. New cars have rear-view cameras to promote safe reversing, but some of the screens are so small and prone to glare that they're actually worse than having no rear-view screen at all, as drivers slavishly attempt to make use of the glare-ridden screens to the detriment of their driving skills.
And how about that college diploma that now costs $120,000 and up? Has the utility value increased or decreased?? How about the effectiveness of healthcare in terms of improving health and healthy longevity? How about the immense suffering created by addiction to supposedly "safe" and "non-addictive" opioid medications? Did the BLS calculate the CPI cost adjustment of the gargantuan decline in the quality of our national life due to the widespread distribution of addictive opioids?
If we could be honest with ourselves, we would have to conclude that any comprehensive accounting of anhedonic quality adjustments would double or triple the rate of inflation as measured by the Consumer Price Index.
The quality, durability, utility and enjoyment-of-use of our products and services has been plummeting for years. This is a core reason why the official rate of inflation/CPI is a complete joke. Welcome to Anhedonia.
Of related interest:
Earn 25,000 Points To Nowhere (July 24, 2013) (humor)
My 31-Year Old Apple Mac Started Up Fine After 15 Years in a Box (February 28, 2015)


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Monday, October 09, 2017

Our Protected, Predatory Oligarchy: Dirty Secrets, Dirty Lies

If you want to understand why the status quo is unraveling, start by examining the feudal structure of our society, politics and economy.
The revelations coming to light about Hollywood Oligarch Harvey Weinstein perfectly capture the true nature of our status quo: a rotten-to-the-core, predatory, exploitive oligarchy of dirty secrets and dirty lies protected by an army of self-serving sycophants, servile toadies on the make and well-paid legal mercenaries. Predators aren't an aberration of the Establishment; they are the perfection of the Establishment, which protects abusive, exploitive predator-oligarchs lest the feudal injustices of life in America be revealed for all to see.
The predators reckon their aristocratic status in Hollywood/D.C. grants them a feudal-era droit du seigneur (rights of the lord) to take whatever gratifications they desire from any female who has the grave misfortune to enter their malefic orbit.
Anyone who protests or makes efforts to go public is threatened by the oligarch's thugs and discredited/smeared by the oligarch's take-no-prisoners legal mercenaries. (Recall the Clintons' Crisis Management Team tasked with crushing any Bimbo Eruptions, i.e. any eruptions of the truth about Bill's well-known-to-insiders predation of the peasantry.)
The dirty secret is that the oh-so-hypocritical power elites of Hollywood and Washington D.C. circle the wagons to protect One of Their Own from being unmasked. The first weapons of choice in this defense are (as noted above) threats from thugs, discrediting the exploited via the oligarchy's paid goons and lackeys in the mainstream media and dirty lies about what a great and good fellow the oligarch predator is. The last line of defense is a hefty bribe to silence any peasant still standing after the oligarchs' onslaught of threats, smears and lies.
Should the worst happen and some sliver of the truth emerge despite the best efforts of the thugs, corporate media, legal mercenaries and PR handlers, then the playbook follows the script of any well-managed Communist dictatorship:the oligarch predator is thrown to the wolves to protect the oligarchs' systemic predation and exploitation of the peasantry/debt-serfs.
Just as in a one-party Communist dictatorship, an occasional sacrificial offering is made to support the propaganda that the predators are outliers rather than the only possible output of a predatory, exploitive feudal status quo comprised of a small elite of super-wealthy and powerful oligarchs at the top and all the powerless debt-serfs at the bottom who must do their bidding in bed, in the boardroom, in the corridors of political power, and in the private quarters of their yachts and island hideaways.
Media reports suggest that the real reason Mr. Weinstein has been fired is not his alleged conduct over the past 27 years but his loss of the golden touch in generating movie-magic loot for the oh-so-liberal and politically correct Hollywood gang that was pleased to protect Mr. Weinstein when he was busy enriching them.
What's truly noteworthy here is not the sordid allegations and history of payoffs--it's the 27 years of intense protection the Hollywood/ media /D.C. status quo provided, despite hundreds of insiders knowing the truth. Just as hundreds of insiders with top secret clearance knew about the contents of the Pentagon Papers, and thus knew the Vietnam War was little more than an accumulation of official lies designed to protect the self-serving elites at the top of the power pyramid, only one analyst had the courage to risk his career and liberty to release the truth to the American public: Daniel Ellsberg.
Why are we not surprised that Hollywood, the corporate media and Washington D.C. lack even one courageous insider?
If you want to understand why the status quo is unraveling, start by examining the feudal structure of our society, politics and economy, and the endemic corruption, predation and exploitation of the privileged oligarchs at the top.
Then count the armies of self-serving sycophants, toadies, lackeys, hacks, apologists, flunkies, careerists and legal-team mercenaries who toil ceaselessly to protect their oligarch overlords from exposure.
Open your eyes, America: there are two systems of "justice": one for the wealthy and powerful oligarchs, and an overcrowded gulag of serfs forced to plea-bargain in the other. If John Q. Public had done the deeds Mr. Weinstein is alleged to have done, Mr. Public would have long been in prison.
As Orwell observed about a totalitarian oligarchy, some are more equal than others.



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