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Musings Report 2018-20 5-19-18 What's Wrong with the Economy: The Big Picture
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
What's Wrong with the Economy: The Big Picture
If asked to summarize what's wrong with the economy--the Big Picture, the view from 30,000 feet, etc.--I would list five structural dynamics that then generate secondary dynamics:
1. The financialization of the economy, which transformed services, credit, risk and labor into commodities that could be traded globally. Financialization generates enormously asymmetric returns: those with access to low-cost credit, global markets and expertise in finance collect the lion's share of gains in income and wealth.
2. The technological transformation of the economy, which has placed a substantial scarcity premium on specific tech/managerial/communication skills and devalued ordinary labor and capital. As a result, the majority of gains in wealth and income flow to those with the scarce skills and forms of capital, leaving little for ordinary labor and capital.
3. The end of cheap fossil fuels. The fracking boom/bubble has obscured the long-term secular trend: the depletion of cheap-to-access and process oil. As many analysts have observed (Nate Hagens, Gail Tverberg, Richard Heinberg, Chris Martenson et al.), the global economy only grows if energy and credit are both cheap.
4. Globalization, which transformed the developing world into the environmental dumping ground of the wealthy nations and enabled the owners of capital to offshore waste and labor.
5. The destructive consequences of "growth at any cost" are piling up. "Growth" is the one constant of all existing political-economic systems, and none of the current Modes of Production (i.e. the structures that organize production, consumption, the economy and society) recognize that "growth" is not sustainable.
The first two dynamics drive three other dynamics that have hollowed out the productive economy:
6. The dominance of debt-funded speculation as the means of "getting ahead" as opposed to producing products and services of intrinsic value that serve the core needs of communities.
7. The economy's gains in income and wealth are concentrated in the very top of the wealth-power pyramid: the top 5%--entrepreneurs, professionals and technocrats, etc., and within this class, most of the gains go to the top 1/10th of 1% --the existing owners of wealth, and financiers/speculators with access to cheap credit.
The net result is the bottom 95% have few opportunities to "get ahead" outside of gambling in the asset bubbles du jour: the stock and housing market. While the average middle class household may be able to borrow enough to speculate in the housing bubble, two factors limit the odds of success for ordinary investors/gamblers:
A. The gains in housing are concentrated in specific markets; outside these hot markets, gains are modest.
B. Asset bubbles eventually pop, leaving those still owning the assets with losses. The risks are thus intrinsic and high. The average investor/gambler lacks the experience needed to recognize the bubble has stopped expanding and exit the market before all the other speculators rush for the narrowing exit.
8. The devaluation of ordinary labor and capital means the bottom 60% of the populace who lack the skills with a scarcity premium in the Emerging Economy have lost easy access to the ladder of social mobility.
The 20% above the bottom 60% may appear to have some access to social/economic mobility, but this is largely an artifact of the bubble economy since 2009. Once the bubble deflates, the illusion of social mobility for the "middle class" between the bottom 60% and the upper 20% vanishes.
The "upper middle class" between the bottom 80% and the top 5% is being squeezed by the relative abundance of those with college degrees and the relative scarcity of secure jobs within the top 5%. As a result, credential inflation is rampant, with Masters Degrees replacing Bachelors Degrees as the default for a white-collar job, and PhDs replacing Masters diplomas as the new default for upper-level positions that lack security and upward mobility.
In other words, the number of people who qualify for and desire a slot in the elite class (top 5%) far exceeds the number of slots available. As Peter Turchin has explained, this competition generates social disorder at the top of economic heap as the top 20% fight over the few positions open in the top 5%. The disgruntled, frustrated losers far outnumber the relatively few winners.
These eight dynamics are mutually reinforcing, meaning that each dynamic strengthens one or more of the others, reinforcing each other so the sum of the eight is far more powerful than a mere addition might suggest.
By happenstance, a long-form exploration of the demise of social mobility and the concentration of wealth and income in the top tier was just published by The Atlantic magazine: The New Aristocracy (the top 9.9%). I would only note that the majority of the income/wealth held by the top 9.9% is concentrated in the top 5%, so the author's line at 9.9% can be viewed as generous. I think the facts speak to a higher concentration and a much narrower ladder of social mobility, but this is a quibble not a refutation of his primary thesis about a new self-perpetuating Aristocracy.
Highlights of the Blog This Past Week
U.S. Healthcare Isn't Broken--It's 'Fixed'
The Roundtable Insight – Charles Hugh Smith On The Developing Trade Wars (podcast)
Best Thing That Happened To Me This Week
The architectural design and engineering work on the addition I hope to start later this year is approaching completion, and I'm starting to get excited about building something from scratch for the first time in 32 years.
Market Musings: Oil (WTIC)
One of the more reliable correlations in the global economy is the price of oil accelerates growth when it's low and depresses growth when it's high.
When oil spikes higher, recessions follow. When oil slowly moves higher, as it has for months, it tightens a noose around consumer borrowing and spending. At some point, this restriction has consequences.
There are already signs that demand for oil has dropped in response to its recent rise above $70/barrel (Brent crude touched $80/barrel).
Many analysts claim oil prices no longer matter, as energy is now a smaller piece of the economy compared to the Oil Shock era of the 1970s. But oil is still the master resource: rising oil prices don't matter, until they do. This is a dynamic worth monitoring should oil continue its uptrend.
From Left Field
Our New, Happy Life? The Ideology of Development by Charles Eisenstein. If you're not familiar with his work,. this is an excellent intro...
'duck curve' is solar energy's greatest challenge (video) (via John F.)
Peculiar Parallel--if you look at the S&P 500 and Bitcoin, they are virtually in lockstep.
You’re Not Just Imagining It. Your Job Is Absolute BS --Graeber can afford to be a bomb-thrower; he's got tenure...
Why Don’t People Who Can’t Afford Housing Just Move Where It’s Cheaper? Insightful--social networks are valuable...
Medical Mystery: Something Happened to U.S. Health Spending After 1980. centralization increased, local control of hospitals and clinics disappeared....
How Much Money Do You Need to Be Wealthy in America? -- $1.2 million might be enough in low-cost regions, $2.4 million is probably minimum in high-cost regions. What really matters is the income derived from the wealth....
Are We Ready for Robot Sex? What you learn about human desire when you get intimate with a piece of talking silicone.
Report: Minnesota has one of the highest rates of depression in U.S. -- regions with long winters generate SAD (sunlight deficits)...
Disney Dancing Animation Supercut (3:26) (via LaserLefty) -- fun to remember how central dancing is to Disney animation...
"The blazing fire makes flame and brightness out of everything that is thrown into it." Marcus Aurelius
Thanks for reading--
charles |
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