Economic Situation – Working Draft

Economic Situation

This document represents our team’s latest working draft of the Economic Situation. Please read it and identify errors and important omissions in the comments section below.


The economic situation in the U.S. as of May 2020 is the worst it’s been since 1929.

There are myriad causes–which have been developing for decades–and are now intensifying. We start with a list of what we believe to be the most important issues, and briefly discuss each in turn. After you’ve absorbed the material in this Situation 2020 report, let’s start a dialogue on the implications for our economic future, so we can develop a better set of alternatives.

Primary Forces Affecting Our Economy Today

Automation

Automation is the use of technology, tools and processes to increase the productivity and profitability of business by increasing output per unit of labor. It needn’t be the case, but automation often reduces the amount of labor used in production, while (in theory) increasing the return to labor–i.e., the wage paid for that activity. Unfortunately, wages have not kept up with productivity growth in recent years, as companies have absorbed productivity gains into their profit margins. Many reasons have been given for this phenomenon, including the threat of job cuts via further automation, outsourcing aspects of production to lower-cost firms, relocation of factories abroad, and the breaking of unions. Automation doesn’t just eliminate rote work; with the advent of artificial intelligence, “knowledge economy” jobs are being eliminated as well.

Productivity has increased by an average of 2 percent per year since 1980. If we assume that all productivity gains result from the elimination of labor from production, the chart above illustrates the potential reduction in labor demand over the course of 26 years. At year 26 (i.e., 2006) we’d need half the number of workers relative to year 1 to produce the same quantity and quality of output. Put differently, we’d have to double output every 26 years in order to maintain full employment.

Even as productivity gains reduced the demand for skilled workers, the number of working-age Americans increased by 57% between 1980 and 2020. As the chart below shows, wages have not kept pace with productivity growth since 1973, indeed, they’ve barely kept pace with inflation.

Globalization

According to the World Bank the global labor force increased from 2.3 to 3.4 billion people from 1990 through 2019. In today’s free-trade environment, that means the U.S. worker is now competing with 3.4 billion other workers. Initially, this affected employees involved in the production of tradable goods such as TVs, cars, ships, and monkey wrenches. Increasingly foreign workers are providing services such as legal research, interpretation of MRI scans, and financial models.

Most of those new workers live in countries with a relatively low standard of living, looser safety standards and lax environmental rules compared to the workers who live in the United States. Workers from these countries are perfectly delighted to get 10% of what an American worker would accept to do the same job. In a free-trade environment, the price of labor on a global basis tends to fall toward the lowest available wage, and the so-called “race to the bottom” begins.

Naturally, this puts enormous pressure on developed country wages, and it provides equally enormous incentives to move production from high-wage countries to low-wage countries. And that is exactly what happened, on an enormous scale, to American manufacturing. What Automation spared, Globalization decimated. That one-two punch severely degraded the American worker’s ability to sustain a middle class income. Many of those displaced from the industrial economy took lower-paying, less productive jobs in the services sector: restaurant workers, home health aides, personal service providers, etc.

As U.S. jobs were either automated or globalized away, the returns to workers (often measured as the share of labor in national income) declined steadily. Today, labor has almost no leverage, or “pricing power” in an automated and globalized economy. Real wages (incomes that are adjusted for the cost of living) have stagnated or declined for the majority of the U.S. workforce over the past three decades. This is is the root cause of our current economic malaise. As real household income falls, so does the demand for goods and services across the economy. Initially, families offset the income shortfall by borrowing, and many have received transfer payments from the government. These remedies helped households maintain their standard of living, but have become untenable given the escalation of debt burdens and depletion of savings needed for retirement.

The Fed as Savior

Throughout the 1980s, 1990s and 2000s, the world experienced an extended period of declining inflation as a consequence of automation and globalization. This is sometimes known as “good disinflation,” since prices fall (or rise more slowly) due to improving productivity. You can think of the decline in prices of personal computers–relative to their productive capacity–as the iconic example of good disinflation. This phenomenon is very different than the debt-deflation that occurred after the 1929 stock market crash, when a daisy chain of bankruptcies caused a collapse in demand, which led to falling prices.

The Federal Reserve might have interpreted the low inflation of this post-1980s era as a “good disinflation” were it not for Japan, whose economy cratered after the popping of its stock- and real estate market bubbles in 1989. Policymakers feared a repeat of what happened in the U.S. in 1929. Deflationary spirals are the one thing central banks fear most, and for good reason. They are the Black Death to an economy, and once they start, they are notoriously difficult to stop. Bankruptcy by one company undermines the creditworthiness of its partners; one employee laid off causes a decline in demand that undercuts the businesses he or she patronizes. Pretty soon economic activity grinds to a halt, and it’s vastly more difficult to restart that activity than it was to stop it. Central banks are terrified of deflation. That might explain why they have been throwing massive amounts of money into the economy at the earliest sign of financial market distress or rising unemployment.

Even if central banks were correct in their inflation diagnoses, there are limits on their ability to solve problems in the real economy. It’s very easy to create digital money – that’s just a few book-keeping entries. But it’s very difficult to get that money into the hands of people who will use it in ways that actually help the economy. Because the Fed represents a consortium of private banks, it does its work primarily through the banking system. Banks lend money based on the prospect of future interest payments and the return of principal. There are very few who will reliably lend money in a weak economy, and almost none who do so when a deflationary spiral looms.

Nevertheless, the Fed feels it must do something. When a crisis arrives, the central bank digitally creates money, which is used to buy newly-issued and existing debt instruments, such as US Treasury bonds and government-guranteed mortgage bonds. The central bank takes newly-issued Treasury bonds onto its balance sheet, and in exchange credits the government’s deposit account at the Fed. The Treasury is then free to spend the funds in all the ways government can dream up–which may or may not support the economy. Fed purchases of existing securities are done through the secondary market, from investors, banks and other financial institutions. The sellers may take the cash and hold it in reserve; they may lend it out or, alternatively, use it to purchase other financial assets.

This where the expression “monetizing the debt” comes from. The Fed creates digital currency and in so doing expands the money supply. Some of the money gets into the real economy via government spending and bank lending. However, government programs aren’t always productive–a great deal of the budget goes toward Social Security transfer payments, inflated health care spending (via Medicare and Medicaid), miltary ventures and interest on the debt. Nor are bank loans always productive; a significant portion of corporate borrowing in recent years has gone toward stock buybacks. These activities may or may not be beneficial to the recipients, but it’s hard to argue that they expand the productive capacity of the economy.

There is no evidence that low interest rates support economic growth; if anything, the opposite is true. And yet, during each of the recent economic crises, from the 2000 Dot-Com Bubble, the 2008 Real Estate Bubble, and the latest Everything Bubble (2019)–compounded by the Covid-19 crisis–the Fed has swooped in to “rescue” the economy with low interest rates to drive ever more borrowing. Households and businesses are staggering under the burden of unpayable debts–and a near-total absence of “rainy day” funds. As a result, it’s taken progressively greater heroics from central banks to resuscitate the economy. They’re caught in the ultimate monetary Catch-22, having followed in Japan’s footsteps by creating the very debt-deflation they sought to avoid.

Financialization

With the entry of China into the global economy, U.S. companies discovered that they could pack up their factories and ship them to Asia, fire their U.S. employees, and re-start production with vastly lower costs, all the while continuing to sell their products into rich U.S. consumer market. Profits skyrocketed. Egged on by consultants and activist shareholders, most large US firms jumped on the bandwagon.

As globalization and automation increased the leverage of corporations over their workers, the Federal Reserve’s easy-money policies provided the funds that busineses used to transform their operations and role in the economy. The classical view of finance is defined by its role in allocating capital to the the most productive business endeavors; profits are shared with employees and customers via the competitive operation of product and labor markets. That started to change with the re-conception of “shareholder value added” in the 1980s. Companies seek to establish dominant industry positions so as to use their market power to extract wealth from customers and employees. Regardless of the consequences for society, shareholders are prioritized over other stakeholders–and financial engineering gives them the tools to do so.

Around the same time, private equity firms such as KKR and Bain Capital invented the “leveraged buy-out”. Here’s how it works: you identify a company that has a strong credit rating and use its good standing to borrow huge sums of money in order to “buy out” the new equity investors. Some of the proceeds are invested into the company’s operations, and some are distributed to the investors as dividends or “management fees.” Sometimes the target companies benefit from this management, and sometimes the debt-laden husk of a company is simply sold for whatever can be had. This technique has gathered steam since 2000 as heavy hitters Blackstone and Carlyle copied the KKR/Bain model. Corporate leverage ratios skyrocketed, leaving companies ill prepared for recession, much less a crisis as serious as the one created by the coronavirus. Nevertheless, privately-funded mergers and acquisitions march on, now that “everything is private equity.”

Not only did the Federal Reserve’s low-interest rate policies offer ready financing for these transactions, they spurred a “reach for yield” into the most illiquid and risky corners of the financial market. In the early 2000s, banks and “shadow banks” (other financial intermediaries) learned that they could originate mortgages for people that weren’t credit-worthy, box up those questionable mortgages into a package, and stamp a phony “aggregate credit rating” onto that package–based on the dubious assumption that there would never be a national real estate slump. Those high-yielding AAA-rated bonds (an oxymoron if there ever was one!) were sold to unsuspecting investors who needed something to buy with all the liquidity floating around. These are just a few of the “innovations” that the financial industry developed in order to extract wealth from the rest of teh economy–until the wheels came off the wagon in 2008.

The problems of self-dealing and disguised risk became glaringly obvious with the Great Financial Crisis. And yet, after the commotion died down, little was done to change it. Not only are banks still “too big to fail,” they’re bigger than ever. Not a single financier was criminally prosecuted for the mortgage fiasco, even as millions of Americans lost their homes. Bailouts by the Fed of irresponsible and predatory industry leaders continues to this day, funneled through the financial system the very people and organizations that created the problem. Risk in the shadow banking sector has continued to escalate–but remains murky–as evidenced by the dramatic market turmoil of March 2020. Now we have Financialization on Steroids.

Excellent discusion on Financialization. 20-minutes.

Having run out of ideas for generating earnings–which have stagnated since 2011–corporations took advantage of historically low interest rates to issue corporate debt, and use the proceeds to buy back their own stock. The reduction in share counts artificially boosts earnings per share, and tends to juice stock prices, thus rewarding corporate insiders with option-based compensation schemes. Meanwhile, as in the leveraged buy-out, companies are saddled with massive debts. If that weren’t bad enough (stock buybacks used to be illegal!) corporate executives raided their “rainy-day” funds in order to “return” cash to shareholders. Boeing is the poster child for irrational financial engineering; a once-great aircraft manufacturer and flagship American company, is now teetering on the edge of bankruptcy.

A fair-minded person would ask: “Is this a story of a few bad actors, or is this sort of self-destructive activity endemic to America’s major investors?” It’s looking increasingly as though the focus of corporate management has shifted away from creating great products and companies, and toward short-term share price appreciation. It makes one wonder if the entire investor class woke up one morning and decided to liquidate or otherwise extract all the wealth that was accumulated in our corporate infrastructure. Have investors given up on America? Do they know something the rest of us don’t?

The United States of Debt

We Americans have demonstrated a remarkable propensity to accumulate and abuse debt at all levels of our society. Households have relied on borrowing — from their paychecks, from their 401k plans, even from their home equity — in order to maintain an unaffordable standard of living. Corporations loaded up on debt to fund generous CEO compensation packages, stock buybacks, and dividend distributions. Governments issued debt to fund transfer payments across its citizenry, while letting our national infrastructure languish. In a way politicians mimicked the behavior of corporations; both groups took on debt as a way to move money around, rather than to build a more productive economy. Look in the mirror, fellow citizens, and take a bow.

We are awash in debt, and there’s no way we’re going to be able to pay it back. We’re dragging a very large boat anchor, and it’s wearing us down. The reason interest rates absolutely must stay low is simple: if they rise very much, that boat anchor will pull us under.

Who is buying our national debt? The traditional buyers were about evenly divided between domestic and foreign investors. Domestic buyers include retirement funds, corporations and Social Security. Foreign buyers are investors, corporations and central banks who use the dollar as a trading currency or as store of value. Lately, foreigners’ appetite for our debt has abated considerably. This is mostly a reflection of politics; we have alienated foreign partners with our trade war with China, and use of the SWIFT inter-bank settlement system as a tool of sanctions. China, Russia, Iran and other countries are increasingly determined to create an alternative mechanism for invoicing trade except the dollar. Here is a graph of U.S. National Debt ownership, by type of entity, over the past few decades. Notice how the share of debt held by foreigners has plateaued.

Declining Velocity of Money

Even as our debts have grown, they’ve become less productive; we’ve not allocated the funds in such a way as to generate income toward repayment. Hence, the ratio of US debt to GDP rises inexorably. Another way of looking at the same phenomeon is to compare the amount of money in circulation relative to our GDP. That statistic, known as “velocity,” measures the number of times money changes hands via purchase transactions. The bigger the money supply, and the greater its velocity, the more economic activity it supports.

As the chart below shows, the velocity of money in the U.S.–and in other contries–has been falling for the past two decades. You can bet that this chart bugs the Federal Reserve every time they look at it, and they look at it a lot. It’s quite apparent that monetary policy is not producing faster growth.

As noted above, a big part of the problem is that liquidity gets trapped in the financial system–and in the hands of the wealthy. What happens when rich people get all the money? They don’t spend much as compared with someone who really needs the income. They save most of their wealth, and that tends to immobilize our money.

In contrast, if a poor person got some extra cash, they’d run right out and spend it on all the things they need–and whatever else they’ve been missing all these years. This story explains the connection between money velocity and growth.

Dwindling Entrepreneurship

Another source of stagnation has been the decline in new business formation since the early 2000s. Here’s a chart that shows new businesses that were formed and then prospered enough to hire employees. Many explanations have been offered for this unfortunate trend, including an aging demographic, the burdens of regulation, rising business costs, and heavy student debt burdens among would-be entrepreneurs. Many firms that launch successfully are subsequently acquired, reducing the number of independent entities. Between mergers & acquisitions, business failures and stock buybacks, the number of US public companies has fallen by half since the late 1990s–to about 3,800 today.

New Companies Having Payroll Within 1 Year of Formation.
Source is U.S. Bureau of Census

What’s interesting is that there has been no shortage of new “firms” since the Great Recession ended. However, many of these are sole proprietorships in service to the so-called “gig economy” — each of which has a single employee beholden to one of the large platform monopolies. This isn’t what we think of when we talk about entrepreneurs.

Quote Freelancers now represent 35% of the total U.S. working population and could represent more than half of the nation’s workforce by 2027

Morgan Stanley Research. The Gig Economy Goes Global. 2018

Oligopoly and Oligarchy

The flip side of the reduction in the labor share is the rise in the capital share of national income. Capital, expressed as “embodied technology” in the form of machinery, software, production methods and the like, are owned by the relative few. Workers use someone else’s technology to make products, and the worker doesn’t capture the full benefits of that technology. Every year, the fruits of technology have accumulated in fewer and fewer hands, as a smaller proportion of an affluent person’s income is consumed–the rest is saved and compounded into greater wealth.

Quote A recent study by the Federal Reserve reveals the shocking extent of accelerating wealth inequality in America. Out of America’s total assets of $114 trillion owned by Americans in 2018, the wealthiest 10% of Americans owned 70% (up from 61% in 1989), while the bottom 50% of American households had virtually no net worth at all—down from 4% in 1989 to 1%  in 2018.

Steve Denning, senior columnist at Forbes. Read his excellent article here.

Some concentration of wealth is a natural consequence of the uneven distribution of talent across the population. However, when it reaches the kind of extreme we now see in the U.S., that is an unnatural consequence of increasingly concentrated industry, financial power and political influence.

The US economy and financial markets are now characterized by extreme concentration of money and power, which has corrupted the operations of our government.  The Supreme Court’s Citizens United ruling of 2010, which designated corporations as persons with a right to exercise “free speech” through their political contributions, opened the floodgates for improper influence of our elected officials.  The problem didn’t start a decade ago, but it has become progressively worse, as large corporations have used their political leverage to seek merger approvals, favorable tax treatment, subsidies and regulatory forbearance in order to cement their monopolistic positions.  As a result, we are now trapped in a self-reinforcing dynamic of financial and political domination by wealthy business and political elites.

The most conspicuous example is the revolving door of financial officials who move to and from Wall Street. Where do Federal Reserve leaders go before and after they have the (unelected) privilege of determining the most basic price in our economy–the price of money? To hedge fund Citadel (Ben Bernanke); Asset Manager PIMCO (Richard Clarida, Ben Bernanke, Alan Greenspan, Neel Kashkari); and The Carlyle Group (Jay Powell and Randall Quarles). Not coincidentally, the Federal Reserve’s easy money policies, which were designed by Bernanke to boost asset prices and thereby produce a “wealth effect” on personal spending, have dramatically increased the wealth divide in this country. Wealth is something these people know how to create–shared prosperity, not so much.

BlackRock–which was just chosen to manage the Fed’s asset buying program–is a veritable haven for formal central bankers: Philipp Hildebrand, former head of the Swiss National Bank, is vice chairman; George Osborne, former Chancellor of the UK Exchequer, is a senior advisor; as is Stanley Fischer, former Vice Chairman of the Fed. Goldman Sachs, dubbed the Vampire Squid by Rolling Stone’s Matt Taibbi, has employed a long list of future and former Fed and US Treasury officials, including: Robert Kaplan (head of the Dallas Fed); Steve Mnuchin (Treasury Secretary, who succeeded Goldman alums Hank Paulson and Robert Rubin in that role); Bill Dudley and Tim Geithner (both heads of the NY Fed; Geithner is now the Chairman of Warburg Pincus). The list of connections and conflicts of interest is staggeringly long, and makes it quite apparent that our economic policies are being run by and for the benefit of bankers, private equity investors, and big business.

The design of the CARES relief package illustrates the result: about $1.5 trillion was directed toward households and small business, whereas ~$4.5 trillion was earmarked for the purchase of financial assets, in order to prop up markets. The “announcement effect” was so powerful that bond yields immediately dropped and companies were quickly able to return to the market for fresh borrowing. Thus did the Fed bail out the investor class without spending much money at all. Since 86% of stocks are held by just 10% of the public, these donor-friendly measures intensified the growing problem of inequality in the U.S., even as hundreds of small businesses failed, and people lined up at food banks all around the country. Many of the businesses that benefited from asset purchases by “special purpose vehicles” were already on the bring of insolvency, having squandered their rainy day funds on stock buybacks.

Republicans say they will not consider additional aid unless and until Democrats agree to legislation that would relieve their big business donors of liability for failing to protect their employees from coronavirus–regardless of the extent or effectiveness of their efforts. They are also using the coronavirus as a pretext to call for cuts to already-low corporate tax rates, even though there’s no evidence that the 2017 cuts did anything to promote business hiring or capital spending. Democrats are hardly better; all signed on to a relief package that was tilted heavily toward big business and investors–with minimal accountability and no transparency. Their latest relief proposal has a provision to support for K-street lobbyists, who can hardly be considered an essential business!

It’s not as if Congressional leaders are unaware that the coronavirus poses a major risk to our economy and markets; four senators who were briefed in January about the developing pandemic rushed to sell millions of dollars of stock in order to avoid losses: Richard Burr (R-NC), Kelly Loeffler (R-GA), Diane Feinstein (D-CA) and James Inhofe (R-OK).

For more information, read our separate post on Oligopoly and Oligarchy.

Government Stimulus Spending

Government has the power–courtesy of the Fed–to spend money into existence. The government borrows the difference between what it spends and what it collects in tax revenue. During the 2008 real estate collapse and resulting Great Recession, the government spent a great deal of money into existence. A number of spending programs were instituted, including:

  • TARP, which bought all those distressed “under water” mortgages no one else would buy. This effectively restarted the moribund mortgage origination mechanism, and made it possible to build and sell new homes. Housing is a huge component of GDP
  • Cash For Clunkers, which bought up used cars in order to stimulate demand for new autos. The auto supply chain is another huge component of GDP
  • Shovel-Ready Projects which dispensed money to states and local government for road improvements, and the
  • Chrysler and GM bailouts.

Each of these programs was instituted in order to provide crucial demand for an economy whose private-sector spending suddenly decreased because of the Real Estate bubble popping.

This is an example of Keynesian stimulus. In 1936 during the Great Depresssion the famous British economist John Maynard Keynes declared that when all other sources of economic demand are paralyzed, it falls to the government to step in and support the economy. Once the economy is again functioning normally, the government is supposed to curtail spending as the private sector starts pulling its own weight. Since the 1990s our national policy has changed; the government continue spending even in good times, so it can’t be said that we’re actually embracing the spirit of Keynesian doctrine. We’re doing the spending part, but not the saving part.

During this latest Covid-19 crisis, the federal government allocated an unprecedented, staggering $2.4 trillion dollars to prop up the economy. One very important feature of this latest stimulus is that a significant portion of the money was simply given to individuals and small businesses to tide them over until this crisis abates. This indicates how dire the situation actually is. No one knows whether it’s enough, or how much permanant damage the coronavirus has been inflicted on the economy. How many $2.4 trillions can we spend of money we don’t have? With each successive convulsion it becomes more obvious that we won’t be able to repay what we’re borrowing from the future.

Covid-19 Pops the Everything Bubble

Unemployment has skyrocketed. A third of families run out of money for food each week. Bankruptcies are skyrocketing. There is a rising toll of death and despair. The Covid-19 epidemic would have hurt a healthy economy, but its effect on ours has been magnified by structural weaknesses that have been accumulating over the past 40 years. The long-running trends described above culminated in the Everything Bubble — our point of maximum vulnerability. Then came Covid-19, the pin that everyone knew would arrive, but no one knew when. Well, it’s finally here.

It could hardly have come at a worse time. Households are ill prepared; half have virtually no savings and are living paycheck to paycheck. 40% of US businesses could not survive a “normal” recession, per the IMF; about a quarter are already “zombies” whose earnings are less than their debt service. Government is up to its ears in debt, even as we allowed our educational system and physical infrastructure to deteriorate.

It’s hard to imagine how we let things get this bad in the span of two generations. One thing we know from centuries of recorded history is that humans are generally resistant to fundamental change until and unless the status quo becomes intolerable. Sadly, it’s much more difficult to achieve real change after the storm hits, the roof has collapsed, we’re standing in a pool of water, and the power lines are down.

The Federal Reserve and the US government will–in due course–do whatever they can to arrest the free-fall. As Winston Churchill said, you can count on Americans to do the right thing, once they’ve tried everything else. There is a real possibility that it won’t be enough; the solution must come from within our society–our families our neighbors, our businesses and our local insitutions. It’s time to start preparing and building a better way.


Contributors to this post include Tom Pfotzer and Karen Parker Feld.

Tom Pfotzer

Tom is an engineer and entrepreneur who has devoted his life to bringing people together to solve problems. He spent twenty years as software developer, systems architect, project manager, and business executive. In 2007 he began his second career building homestead-scale robotic systems to automate greenhouses, irrigation systems and solar thermal energy collection and distribution. Tom lives with his wife on their 40-acre permaculture farm in Northern Virginia.

13 thoughts on “Economic Situation – Working Draft

  1. Well, looks like ya’ll are off to a good start. I’ll be more interested in the “household” level part, since wife and I are retired, and have spent many decades becoming more self sufficient and less dependent on the actions/policies of folks outside our household for our way of life.

    Andy

    1. Andy: Thanks for stopping in. I’m very interested to hear what you’ve done to get yourself situated outside the main economic show. I have been doing the same for a few decades, altho most of my work has been aimed at building stepping stones for me, and others like me to make the transition from cog in others’ machine to running my own “micro-economy”, to use Dave’s term for it.

      As I mentioned in my e-mail, the immediate task is make sure we’ve accurately assessed the current situation, and didn’t leave out anything important. Once that gets iced, we’ll start into the material you’ll find most interesting.

  2. Tom, I believe one’s personal situation is all one can hope to preserve today. Some have used the term “prepping”, but that implies draconian austerity away from all the hoi-polio. There are more reasonable ways, IMO, and those should be thoroughly explored. That means that the major economic problem list above is of informative value but, for us, will only be targets for personal avoidance in one’s own macro-economy.

    1. Dave – and this applies to Andy’s remark as well…there are two things which prompt me to take time to lay the foundation (accurate current situational definition). They are:
      a. Most people are not where you guys are; you al ready know that, and you know why. If I’m going to go to the trouble to build a facility which addresses the core problems, I should probably take time to build an on-ramp that serves most of the people that might need it
      b. While I am pretty confident in the current situation story set out above, on thing I have noticed in my many years as business consultant: I’m often wrong. And the sooner I find out where I’m wrong, the better for all parties. I might be wrong and this is the time to find out, before I invest a lot of my, and others’ time in solutions that aren’t well-founded on problem-definitions.

      Next: Yes, the situation analysis provides some very useful “things to avoid”. That’ll be the next post: What does this situation, and the forces which delivered it, mean to a household on a going-forwards basis. Again, this doc isn’t squarely aimed at where you and Andy are, but it’ll provide the rationale for (the focus-areas, and there are several) for the opening of the Solutions discussion, and that’ll be home-turf for you and Andy.

      So, just like building a house – you don’t spend months on the foundation; just a few weeks. But that foundation better be done solidly, or all the great carpenter work, and all those wonderful materials are going to settle, windows won’t work, floor creaks, drywall cracks….you know the drill.

      Lastly, I’d like to re-inforce that assertion that draconian prepper-work may be one end of a continuum (and possibly a very necessary end, depending upon just how extreme we allow ourselves to get), but there are a whole lot of versions of that “micro-economy”, one for every individual household, and ones that’ll work @ the urban, suburban, and rural levels. I currently believe that having some land offers key advantages, but this may not be so. We’ll see. BTW, Dave, is that term “micro-economy” one you coined / originated? I’d not seen it used in this context / with this meaning before. Let me know. I’m planning on writing on that general subject in the future, and I want to use your term, and provide attribution to you if indeed you’re its originator.

      1. It’s original with me. But, as a patent examiner I sometimes had to start a procedure called an interference proceeding, where the office needed to determine which inventor was the first inventor of a device who’s “time had come”. Who knows – “micro-economy” might have been used before, but not that I know of.

        1. RD,

          You should give it the “internet patent”……steal it, use it three times, and one can claim it as your own….ahahhaaaa

  3. This is a well written and accurate analysis of where we are today. The breakdown of topics is helpful. It allows each topic to be looked at, and what can be changed for improvement.

    On Automation:
    “If we assume that all productivity gains result from the elimination of labor from production.” I am a bit troubled by this generalization, and it caught my eye right away.
    From a business owner’s point of view, productivity gains made by reducing the number of workers has its appeal, but some productivity gains are from the use of better equipment in manufacturing – with the same number of workers.
    And productivity gains can happen from better access to data. An example I see is at my doctor’s office/hospital. HCMC (Hennepin County Medical Center in Mpls) has a great system that integrates everything for the doctors, physician assistants, pharmacy, labs and patients. The doctors are much more efficient and productive with the new technology.

    On Globalization:
    One trend that can disrupt globalization is gathering momentum, but it is still just a fraction of the global economic machine. Most of my friends, and certainly I, do everything within our power to avoid Chinese made products. It is not easy, and it can cost more, but much of the time it can be done.
    My main reason for avoiding Chinese made stuff is the lack of quality, but arguments can be made for avoiding them because of the nature and actions of the Chinese government.

    The Federal Reserve:
    The USA is held hostage in perpetuity to having its issuance of currency and the price of capital controlled by a private banking cartel. When the Fed was created, it was given a 20 year charter, but on 25 February 1927 the McFadden Act was passed, and the Fed lives forever – or until Congress intervenes. Congress will not intervene until the two party duopoly is broken.
    The 13 Colonies did not have a unified currency when the USA was born. The power to issue the dollar has been the most important prize that has been fought for since the birth of our nation. Hamilton wanted the banking cartel to have control. Jefferson and many of the Founders wanted control to be held by the Treasury. The Founders are rolling in their graves at what is happening with the Fed and Congress today.

    Thank you Tom. I will comment on more of your realeconomy.org Economic Situation – Working Draft soon.

    1. Dan: Now that’s what I call “feedback”. Well done.
      a. Yes, I concur that productivity increases can and certainly do include productivity from better methods, materials, tools, and the like (e.g. technology). No question. I knew I was gonna get dinged on that, made a mental note to issue a qualifier, but it slipped past me.
      b. Yes, I also concur that globalization will attenuate, and for a variety of reasons. The trade war is one obvious example; that was unthinkable just 5 years ago, and look at it now. The numbers haven’t changed all that much, but the atmospherics most certainly have. However, even if production does return to the U.S., the jobs – the way and number they used to be – aren’t returning. The next-gen factories are going to be very different than the ones we and our parents worked in.
      c. Fed Reserve and money creation. I was mostly happy with the Fed until about the time of Volcker. It then morphed from managing the money supply to being the go-to tool for industrial, trade, and even foreign policy. The disconnect of dollar from gold by Nixon was a watershed event, as it really enabled the U.S. to exercise that “exorbitant privilege” in a way previously un-imagined. The other watershed event was the granting of control over money to the banks (who own the Fed, and to whom the Fed is most directly accountable).

      Lastly, the debate between Hamilton and Jefferson deserves a good thorough review. As we talk about “micro-economies” .vs. “macro-economies”, we’re echoing the Jefferson farmer-artisan version of an economy .vs. Hamilton’s capital-intensive centralized economy. That schism also contributed to the war between the States.

      ===== one more little aside re: productivity.
      Back in the day, I used to frequent Bill McBride’s Calculated Risk blog, and there was a poster there called DryFly. He was a tool and die salesman, was toward the end of a long career. He would regularly call upon / sell to auto-supply-chain factories throughout the mid-west (up your way, Dan). He once said “in the early years of my career, I’d go into a factory and it’d be crawling with people. Hundreds of people. I go to the very same factory today, and I see a few dozen at most. Some people setting up the feedstock for the machines, some doing robot maintanance. Greater output, lot less people”

    2. Thanks Dan. To me, the important issue with respect to productivity is that wages have not kept up, even when labor is retained. That’s a reflection, I think, of two things: 1. globalization (which means lowers the cost of even more productive labor) and 2. lack of competition in product (monopoly) and labor (monopsony) markets. So although the example given is extreme, it illustrates the point. I’m generally in favor of free trade, but that’s not what we have with China—just like we don’t have free completion at home. The scales are definitely tilted toward big business, but even those are apparently afraid of the CCP.

      Don’t even get me started on the Fed. What a disaster for our economy and society.

      1. Karen: please do “start in” on the Fed. I think the Fed is a very mis-understood entity, and I also think you’ve earned through your career’s work a viewpoint few others have. Please, at some point, tell us what the Fed did and is doing to influence our economy. Why are they doing it, and to whose benefit. The Fed is clearly the major factor at the macro-econ level and there is so much disinformation and misunderstanding about the Fed. What are the tools, in general terms, the Fed is / will use, what are the limits / trip-wires which signal the end-of-efficacy of their current tools, including monetization, QE, holding interest rates low.

        It seems to me that lately something(s) fundamental within the Fed has changed in the past 10 years or so. Do you see that as well, and if so, will you spell it out? They appear to have made some fundamental policy decisions, and I don’t understand what they are, and why they did it, if indeed they actually did.

        If we are going to plot course to avoid / better-cope with the pernicious effects of the Fed’s actions, we will need to know what the next few Fed moves are, and how long they can sustain them. Any light you care to shed on that subject would be welcome.

  4. Karen and I are now working on the Implications of the Situation piece. It’ll take us all week to get done; there’s a great deal to say. I’m bringing it up now, before it’s published, in order to set the stage, and invite you commenters to start your engines right now with this question: “So What??” We all know Big Things are afoot, but what are the impacts to the household of the trends and forces we’ve outlined above? Why does all this matter?

    Let’s step out of the billowing cloud of fear, anxiety, gabbling and commotion, and identify the tangible impacts to HH (household). Things like income level, job, job security, physical security, inflation, economic disruption (cascade of defaults, for ex), social unrest (the riots), predation by economic sociopaths, and so forth. What about those assets you have accumulated all these years. What’s going to happen to them? Are you going to need to get good at anything you’re not currently good at?

    We’ll have the seed-doc ready in a few days, maybe a bit longer if I finally get my haying weather-window. Meantime, why not take out a sheet of paper, keep it handy, and jot down your take on the impacts to the HH of these forces. When our piece hits the deck, you’ll be ready to hammer it.

    And for all you folks who claim to have it All Figured Out…..I say “Whack! Down went the gauntlet”. Lessee what ya got.
    🙂

  5. On the topic of Financialization:

    I agree with the summary & analysis of where we are at. From my perspective, it is the expected outcome from quite a lot of factors that have combined to shape the planet’s economic machine.
    1) We have the ability to shrink the planet in so many ways now that took a lot longer, and cost more in the past. Air cargo and ocean cargo container shipping is so fast and efficient, that source of manufacture is less important. And that also applies to the cost of labor. Chevy assembles their trucks in Mexico because it costs less. As much as it saddens me that USA workers have fewer jobs, I do own a bit of GM stock, so making trucks in Mexico helps me.

    Trade wars, tariffs and quotas for protectionism are double-edged swords, and in the long run, it is after all a global economy.

    2) Leveraged Buyouts are certainly aided and abetted by cheap and easy money provided by the central banks, but it’s also the cost and risk of taking a company from private status to publicly traded. In 1969, my dad went from working at the USDA to Northrup King Seeds. NK was once privately held, but it went public. Eventually, it got swallowed up by the Swiss company Novartis. That’s just the nature of being publicly traded I’m afraid; the company is worth more than price of the stock to some entity, and they buy it out. Like most people who watch what’s been done by Eddie Lampert & his fellow vultures, I can’t support this type of business, but I don’t see how to stop it.

    3) Not just a few ‘Bad Actors’ are engaged in issuing corporate debt to buy back stocks. The way that Wall Street, the Fed, the WTO and a host of others have the rules of the game set up, it’s, again, an expected outcome. The rules of Economics have been distorted. Capital has virtually no cost, and in essence it has no value. If you sit at the helm of a Fortune 500 company, and you can borrow for less than you payout as a dividend, buying back stock makes sense – on paper at least. Yeah, Boeing has thrown out much of it’s value by doing so over the last decade or two, but they put a new CEO in charge who was schooled as an accountant – not an engineer. That decision speaks volumes.

    That doesn’t offer much in the way of changing Financialization, but that’s how I see it. Thank you Tom & Karen

  6. Dan:
    Another round of great comments. What I see in your remarks is “these are the rules of the game. The effects of those rules are clear, and they’re expected, and logical”. I agree.

    We’re going to grapple with that reality in the next post re: Impact Assessment. The theme of that post is: “If this is the way it is, and it ain’t so good for most of us, what’ll we do?”

    As you can imagine, I’m eager to hear everyone’s reaction to this next post. I’m having a heck of a time writing my part of it. (“heck” in this case is both good and bad).
    🙂

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