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The Winner-Take-All Economy

Tyler Durden's picture




 

When the majority of Americans examine the world around them, they see a stock market at record highs and modest apparent improvement in the economy, but, as John Hussman notes, they also have the sense that something remains terribly wrong, and they can't quite put their finger on it.

Exceprted from John Hussman's Weekly Market Comment,

According to a recent survey by the Federal Reserve, 40% of American families report that they are “just getting by,” and 60% of families do not have sufficient savings to cover even 3 months of expenses. Even Fed Chair Janet Yellen seemed puzzled last week by the contrast between a gradually improving unemployment rate and persistently sluggish real wage growth.

We would suggest that much of this perplexity reflects the application of incorrect models of the world.

Before the 15th century, people gazed at the sky, and believed that other planets would move around the Earth, stop, move backwards for a bit, and then move forward again. Their model of the world – that the Earth was the center of the universe – was the source of this confusion.

Similarly, one of the reasons that the economy seems so confusing at present is that our policy makers are dogmatically following models that have very mixed evidence in reality.

...

Several factors contribute to the broad sense that something in the economy is not right despite exuberant financial markets and a lower rate of unemployment. In our view, the primary factor is two decades of Fed-encouraged misallocation of capital to speculative uses, coupled with the crash of two bubbles (and we suspect a third on the way). This repeated misallocation of investment resources has contributed to a thinning of our capital base that would not have occurred otherwise. The Fed has repeatedly followed a policy course that sacrifices long-term growth by encouraging speculative malinvestment out of impatience for short-term gain. Sustainable repair will only emerge from undistorted, less immediate, but more efficient capital allocation.

In recent years, the U.S. has experienced a collapse in labor participation and weak growth in labor compensation, coupled with an increasingly lopsided distribution of whatever benefits the recent economic recovery has generated. This is not well-explained by Phillips Curves or simplistic appeals to "insufficient demand," and it is unlikely to be improved by endless monetary “stimulus” (the targets that clearly occupy the Fed’s thinking). While our economic challenges can be largely traced to more than a decade of persistent Fed-enabled misallocation of capital, most of the costs of this misallocation have fallen on labor because of a) shifting composition of labor demand that has resulted from an increasing share of international trade with countries with heavy populations of relatively unskilled labor; and b) economic features that increasingly create a “winner-take-all” distribution of economic gains. 

One of the key results in international economics is that as trade opens up between nations, those nations will tend to export goods that intensely use the factor (skilled labor, unskilled labor, capital) with which they are relatively well-endowed. In a world where we have opened up trade with countries that are densely populated with unskilled workers, and where the U.S. is relatively better endowed with skilled labor and capital, the result has been something of a hollowing out of the middle class among households that aren’t themselves endowed with skilled labor or capital. Essentially, the U.S. obtains the services of low-skilled labor more cheaply from abroad than domestically. There is no great debate on this point.

Meanwhile, transfer payments like welfare and unemployment compensation allow many households to maintain consumption despite being out of those jobs, and given the ability of households to take on debt, even if they are actually living paycheck to paycheck, the produced goods get purchased, companies make a profit, government runs a deficit, the Fed keeps interest rates low which allows all the debt to be serviced, and everyone is pleasantly, if unsustainably, happy. That’s particularly true as long as nobody asks how the debt will be repaid, which is certainly what Fed policy encourages.

Now, looking at nations as a whole, academic economists proudly derive various theorems to prove that both nations actually benefit in aggregate from international trade. The problem, however, is in the distribution of those gains. This is particularly true in what might be called “winner-take-all” economies.

Why do professional athletes, movie actors, and even some 23-year-old computer programmers earn so much more than teachers, nurses, and factory-line workers? The answer is simple. They’ve found a way to spread the impact of their efforts over a very large number of individuals, while the teachers, nurses, and factory-line workers can apply their efforts to a dramatically smaller number of “units,” be they students, patients, or boxes of Corn Flakes. For massive too-big-to-fail banks, the units are dollars. The downside is that as certain winners are able to spread their efforts over an enormous number of people, the required number of winners declines – ask anyone who has ever tried to become a movie actor or a pro-basketball player. International trade and internet communications, among other developments, have significantly increased that tendency toward winner-take-all outcomes. When that effect is expanded through international trade, the result is that yes, each country benefits in aggregate, but you also observe a “hollowing out” of the middle class, particularly for families that don’t have labor or capital that shares in the distribution.

...

As for the U.S. economy, QE-induced speculation misallocates resources that might otherwise contribute to long-run growth, and while conditions could certainly be worse, the benefits of this economic recovery have been highly uneven. Again, 40% of families report that they are “just getting by,” with the majority essentially living paycheck to paycheck without enough savings to cover even a few months of expenses. We could be, and should be doing better, except that this complex adaptive system of ours responds to good incentives as well as bad ones, and has been repeatedly crippled by policies that have produced waves of malinvestment, bubble, and collapse. The economy is starting to take on features of a winner-take-all monoculture that encourages and subsidizes too-big-to-fail banks and large-scale financial speculation at the expense of productive real investment and small-to-medium size enterprises. These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions. The Federal Reserve is right to wind down quantitative easing, and would best terminate reinvestment of maturing holdings, ideally beginning in October or quickly thereafter. The issue is not whether the U.S. economy does or does not need “life support.” The issue is that QE is not life support in the first place.

 

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Mon, 08/25/2014 - 17:39 | 5142172 FilthyHabits
FilthyHabits's picture

Winner

Loser

 

ahh dichotomy...

 

Mon, 08/25/2014 - 17:43 | 5142201 NOTaREALmerican
NOTaREALmerican's picture

Re:  dichotomy

That would be: 

Winner

"those people".  

Mon, 08/25/2014 - 17:52 | 5142257 negative rates
negative rates's picture

Q: How many Queens does it take to screw in a light blub?

A: Only one, and the whole world revolves around her.

Mon, 08/25/2014 - 20:22 | 5142777 max2205
max2205's picture

Great words

Mon, 08/25/2014 - 17:44 | 5142210 Alhazred
Alhazred's picture

winner / loser

freedom / slavery

Gold / Silver

 

(one of these things is not like the others"

So do you think i should go with junk silver, or valcambi gold bars?

http://www.bgasc.com/product/90-percent-silver-coins-500-face-value-bag-in-quarters/90-percent-silver-coins-by-the-bag-01

or

http://www.bgasc.com/product/valcambi-50-gram-gold-bullion-combi-bar-w-assay-9999-fine-24kt-gold-gbar_50_gram_vlcmbi/valcambi-gold-bars 

Mon, 08/25/2014 - 17:37 | 5142176 Elliptico
Elliptico's picture

Oh, I think we get it. It's only a question of how far the slaves can be pushed before they revolt.

Mon, 08/25/2014 - 17:42 | 5142196 cougar_w
cougar_w's picture

That might be the question, but I'm not sure. I can see a number of other "interesting" outcomes besides that one.

Mon, 08/25/2014 - 17:45 | 5142221 Alhazred
Alhazred's picture

anyone notice how a cougar is never the wrong answer?

Mon, 08/25/2014 - 22:28 | 5143291 willwork4food
willwork4food's picture

What rhymes with orange?

OK, now what's my prize?

Mon, 08/25/2014 - 17:42 | 5142197 ugmug
ugmug's picture

Turn off the cable and computer game server connection and you'll see the biggest protest ever amassed in civilized history as they all search for more pot to smoke their way back to utopia. People are dumb and lazy....nothing more.

Mon, 08/25/2014 - 17:44 | 5142206 NOTaREALmerican
NOTaREALmerican's picture

They are also not unhappy.   

The smart-n-savvy have done an amazing job at providing the bullshit and bling required to keep the Trash Class just happy enough not to be revolving. 

Mon, 08/25/2014 - 18:48 | 5142450 August
August's picture

Now there you go again... bitchin' about Jeb and Hillary.

Look... a Muslim!

Mon, 08/25/2014 - 18:10 | 5142302 Bastiat
Bastiat's picture

Funny, back in the early 70s I used to say there would never be a revolution as long as there were TVs.  On the other hand, the TV images of the Vietnam war  (back before the temporary aberration of a somewhat free press was corrected) fueled the popular protest and end of it.  

Mon, 08/25/2014 - 20:06 | 5142735 Stuck on Zero
Stuck on Zero's picture

The SSS (draft) fueled the Vietnam protests more than television.

Mon, 08/25/2014 - 17:48 | 5142232 Alhazred
Alhazred's picture

the slaves dont revolt.

governments have gotten far too good in being little preasure cookers.  Never quite enough preasure to explode, they always let the overly excited types out a little at a time, and never need to bring down or stop the heat of taxation or regulation.

 

why do you think we keep taking refuges from mexico?  its because if we didnt, they and the rest of south america would be in civil war mode in less than 5 years.

Mon, 08/25/2014 - 17:40 | 5142184 NOTaREALmerican
NOTaREALmerican's picture

Who cares about the Trash Class.  

Survival of the fittest, BITCHEZZZZ!!!  

Sure, it's tough when your above-average kids turn out to be food for the REAL above-average kids; but REAL Mericans suck-it-up, and move on, knowing that by not bitching about the greatest country in the entire world they won't be accused of being like "those people".  

Mon, 08/25/2014 - 17:38 | 5142185 dbTX
dbTX's picture

The winners always take it all.

Mon, 08/25/2014 - 17:44 | 5142204 cougar_w
cougar_w's picture

The framing of the article as poor. Has less to do with winners when this is not an actual contest. More like piracy and theft. When you frame it that way the whole point of who gets and who keeps becomes silly.

They are taking what is not theirs, we should not be debating about how much gets spread around later.

Mon, 08/25/2014 - 17:40 | 5142193 cougar_w
cougar_w's picture

Winner-takes-all.

Welcome to the lottery economy.

Mon, 08/25/2014 - 17:45 | 5142199 all-priced-in
all-priced-in's picture

I could barely read the whole thing - bla bla bla -  boring as hell -

I see things a little differently - I am more concerned about our government changing things over to a loser gets an equal share.

Winner takes all at least someone wins - in a loser get an equal share everyone becomes a loser.

 

 

Mon, 08/25/2014 - 19:11 | 5142522 ugmug
ugmug's picture

Put the word 'economics' in any title or headline and nobody will read it...

Mon, 08/25/2014 - 17:43 | 5142203 duo
duo's picture

The medical-industrial complex mis-allocates $2T of capital a year.

Mon, 08/25/2014 - 17:48 | 5142226 NOTaREALmerican
NOTaREALmerican's picture

Well,  depends if you're one of the OldFarts getting unlimited new hips, or the doctors doing the work, or the hospital administrators collecting some skim.  

Mis-allocation of capital is a Libertarian morality that doesn't apply in the REAL world of entitled adults (aka, those who live by duplicity).

Mon, 08/25/2014 - 18:13 | 5142313 Alhazred
Alhazred's picture

i dont think you understand "Mis-allocation" as applied to capital in the framework of catalytics.

 

It does not have any connotation of "good" or "bad" or anything so related to frame of reference, it only refers to capital invested in a manor less than optimal due to influences of outside forces modifying the praxiological environment.

the term has nothing to do with positional referece, so your 'Well,  depends if you're one of the OldFarts getting unlimited new hips, or the doctors doing the work, or the hospital administrators collecting some skim.' is a non sequitor.

It is true that many of us find Mis-allocation of resources bad, but this value judgement is not a part of the term it self.

 

Mon, 08/25/2014 - 18:30 | 5142376 NOTaREALmerican
NOTaREALmerican's picture

Re:  It does not have any connotation of "good" or "bad" or anything so related to frame of reference

This sounds like Krugman's defense that "macro economics isn't a morality play" and macro-economics doesn't pick the winners and losers it's just a model that says perpetual spending leads to perpetual growth and - therefore - the model MUST be followed because economics isn't (after-all) a "morality play". So, Krugman can shrug his shoulders and say "his economics" isn't what allowed the "bad people" to win; how could it be because there's NO morality in economic models (and then he sites himself as an expert reference to prove his point). 

In actual fact,  all economics is a morality play, and there are winners and losers resulting how well one is "positioned" to get the loot.

Re:  It is true that many of us find Mis-allocation of resources bad, but this value judgement is not a part of the term it self.

I was using the reality based view of the word "Mis-allocation".   Kinda like "Freedom Fighter".  

He's not a terrorist, he's a freedom-fighter.
That's not a mis-allocation of loot, I'm entitled to that new hip.
Infinite debt doesn't cause corruption, people do. 

Mon, 08/25/2014 - 18:51 | 5142460 Alhazred
Alhazred's picture

In a way your right but i feel you miss the point.

Krugman's keynsian economics is a morality play because it violates the property rights of others.  Even if it did produce growth(which it doesnt), it would still be immoral to do. 

You seem confused about the difference between the impartial study of praxiology and catalytics as done by Ludwig von Mises, and the sophestry of bubbling idiots like krugman.  Economics is rightly the study of cause and effect in the complex network of human interactions, it is conserned with finding what ends are achived with what actions.  it can be put to bad uses or to good uses, it is a neutral area of study.

as to the joking and humor in your post it did not register with me because i am a bland idiotic robotic dicionary.

 

Beep beep boop

Tue, 08/26/2014 - 04:37 | 5143900 hedgiex
hedgiex's picture

Economics are belief systems. The models from them are chosen to embelish the thuggeries.

Mon, 08/25/2014 - 18:50 | 5142459 August
August's picture

America produces the finest statins and SSRIs in the world!

Mon, 08/25/2014 - 17:45 | 5142216 Caviar Emptor
Caviar Emptor's picture

Darwinian Capitalism was supposed to be winner take all. And when it wasn't, the winners turned to fascism aka crony capitalism so that they can have it all with the help of a police state

Mon, 08/25/2014 - 17:52 | 5142252 NoDebt
NoDebt's picture

I think you're closer to the truth than the article.

It's one thing to get it on your own.  It's another to write your own ticket and set up your own interconnected system of control that says you will always get it, no matter what.

Tue, 08/26/2014 - 03:32 | 5143864 bid the soldier...
bid the soldiers shoot's picture

I thought Darwinian Capitalism was "survival of the thievingest"

Mon, 08/25/2014 - 17:45 | 5142218 Fuku Ben
Fuku Ben's picture

Winner Take All

Sounds like low budget 80's porn movie

Mon, 08/25/2014 - 17:47 | 5142230 bid the soldier...
bid the soldiers shoot's picture

Please explain.

Mon, 08/25/2014 - 18:14 | 5142320 Alhazred
Alhazred's picture

no, the porn name of this article is

 

"Thinner takes all"

 

Mon, 08/25/2014 - 17:50 | 5142243 bid the soldier...
bid the soldiers shoot's picture

Orwell might have said: WINNERS SPLIT ALL!


Oceania, Eastasia, Eurasia

Mon, 08/25/2014 - 17:51 | 5142245 novictim
novictim's picture

You just figure this out, Tyler?

Mon, 08/25/2014 - 17:52 | 5142250 ramacers
ramacers's picture

that's ok. we can claw back most from the 1-3% after "the fall". the money or your heads.

Mon, 08/25/2014 - 20:14 | 5142729 Cthonic
Cthonic's picture

That's the tragedy; trillions of real wealth mis-allocated and gone (pissed away on rat holes such as Detroit, ghost cities in Guangdong, firebases in Helmand, uber-embassy and green zone in Baghdad, and the like) ~ on net there is nothing to 'claw back' except promises made by the US Treasury and all the central banks.

Mon, 08/25/2014 - 17:55 | 5142264 unplugged
unplugged's picture

Why don't you save me alot of time and just say "FASCISM"

Mon, 08/25/2014 - 18:05 | 5142287 NoWayJose
NoWayJose's picture

It's election season again - where democrats are campaigning on tax breaks in order to attract more middle class manufacturing jobs. Companies like Burger King are taking their tax cut advice and moving out if the country. And of course, the reason they need to offer tax breaks is that they have raised taxes on all businesses too much! So should the US offer Burger King tax breaks to 'stay' in the US?

Mon, 08/25/2014 - 18:19 | 5142332 Alhazred
Alhazred's picture

They should give EVERYONE TAX BREAKS (as in no taxes at all)

 

Then i might find a burger king chain that will take my 90% junk at x15 face.  ( i want to buy a burger for a dime like me parents did)

http://www.bgasc.com/product/90-silver-dimes-1-face-value-in-90-percent-silver-coins/90-percent-silver-dimes-10c

(now i want 10 burgers per face values)

Mon, 08/25/2014 - 18:07 | 5142291 Seasmoke
Seasmoke's picture

Picking the Winner. Take-ALL-Economoy. 

 

Fixed it. 

Mon, 08/25/2014 - 18:47 | 5142448 Cheduba
Cheduba's picture

"These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions."

The people writing these articles never get it.  The Federal Reserve's policies are designed to f*ck over everyone else in the world.

It is NOT accidental or didn't just "happen" to be this way.

Mon, 08/25/2014 - 18:59 | 5142479 BiPolarFrenchman
BiPolarFrenchman's picture

The only vote you have that counts is the one you make with your wallet. Buy local, starve the beasts.

Mon, 08/25/2014 - 19:04 | 5142493 limacon
limacon's picture

Winner-takes-all is the end phase of the Tragedy of the Commons.

A few players end up with everone's marbles .

There is an out , for which Ostrum got the Nobel for Economics .

See http://andreswhy.blogspot.com/2011/10/ostrum-game.html

Mon, 08/25/2014 - 19:07 | 5142506 JayKitsap
JayKitsap's picture

Although I am rather conservative, I think the Grand Stimulus and similar programs would have have strong positive effects if constructed right.  Our Gov't and the Fed are pushing money into the system with transfer payments and funding banks, but the bank funding basically says they can only buy Gov't paper, not make loans.

So we have thrown away Trillions, when we could have spent the same Trillions on real things - pipelines, new power grids, updated highways, etc. but please no Taj Mahal's.  That would have given jobs to those that need jobs and support main street not Wall Street.

Mon, 08/25/2014 - 20:37 | 5142806 Cthonic
Cthonic's picture

And so, my fellow Americans: ask not what Goldman Sachs can do for you — ask what you and your progeny did for Goldman Sachs.

 

http://blogs.barrons.com/stockstowatchtoday/2014/08/25/goldman-sachs-mor...

17 Nov 2008 - 53.31

25 Aug 2014 - 177.87

http://www.nytimes.com/2008/09/22/business/22bank.html?_r=0

"In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities. It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies."

 

Mon, 08/25/2014 - 19:14 | 5142533 Bastiat
Bastiat's picture

Working Class Hero - John Lennon

https://www.youtube.com/watch?v=Ve-mANenpC4

Mon, 08/25/2014 - 19:24 | 5142576 Muppet
Muppet's picture

Not this excerpt, but Hussman's latest weekly commentary is outstanding and highly recommeded reading.   One of his best .

http://hussman.com/wmc/wmc140825.htm

Mon, 08/25/2014 - 20:25 | 5142789 lindaamick
lindaamick's picture

I call it the Monopoly Game economics.

Mon, 08/25/2014 - 22:34 | 5143320 AdvancingTime
AdvancingTime's picture

Today a big topic is the huge growth in inequality. Those who look closely understand that it is not the 1% at the top stealing the icing off the cake, but the much smaller .1% or .01% that are skewing the numbers and overreaching.

I contend the biggest problem is the massive growth in crony capitalism and corruption in Washington. Much of this can be attributed to the ability of those in control "changing the rules" and positioning themselves to benefit at every corner. In our busy and complex world we have found it impossible to watch all the moving parts. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html

Tue, 08/26/2014 - 04:20 | 5143890 johnmack
johnmack's picture

I take a very machevilian view to all of this. If you are rich with money and somewhat of a sociapath in your understandings of general humanity then you will rejoice in america becoming some third world trap.  What do i mean by this. Argentina and hosts of latin american and european countries were once the wealthiest countries in the world and now the average upper middle class person in argentina or chile can get a maid and gardener for very little  money. How did this happen.... The poor in those societies became impatient and frustrated with what they saw as the  government giving favor to the rich. Thus they went down a heavily socialist path. What is interesting is that it quickly became socialism for the masses and corportism/capitalism for the elite. The rich got richer through issuing of loans to the government to fund their socialist nonsense while offshoring their gains while the government taxed ordinary people to pay for those loans, in time the government debt grow and grow  as people demanded more and the tax burden became worse. So the government further taxed the population and devalued the currency. Meanwhile the elite in that country enjoyed a sort of economic arbitrage. They were getting richer while the country they lived in was getting poorer...labor became cheap (and women too) and the cost/access to education to the masses became simply became too hard to attain, leading to a vicious cycle of poverty, once in is very hard to escape. This is what i see happening to America  slowly at first then abruptly, sure there will be a few protests here and there but people will eventually adjust to their lifestyle and say to themselves but this is how it always was. And there will be large enough pockets of people who will enjoy this new paradigm and enjoy the fact that they can employ a maid and a gardener for a couple of dollars and still be able to goto the mall and buy the latest product.  It is projected in 10 years time a $100 usd will be worth $50 and $20 in 20 years time. meanwhile dont count on nominal real wages going up but either remaining the same. so expect to see $50k usd as a base salary(must people wont be on salaries anymore) but $50 for a beer and $200 for a burger. 

There was already an article on zerohedge about prostitute wages in america steadily going down and as more people lose their jobs expect more competition on that price.

to end we may also see the rich get slighly "poorer" by todays metrics but the poor will be so poor that the net effect will be the rich are vastly richer more so by comparison.

 

 

 

 

 

 

Tue, 08/26/2014 - 07:30 | 5144079 SocialismIsCancer
SocialismIsCancer's picture

There is a continuous stream of propaganda and fantasy about how the wealthy. elites, bankers. etc etc etc  are impoverishing and enslaving the middle-class, workers, ordinary people, etc etc etc. Pure crap. Here is the irrefutable reality by example, looking at one of my employees paystub:

Gross Pay: $3,500

Earnings Confiscated for Federal & State Taxes: $900 = 25.7%

The earnings confiscated by government are the reason why my employees cannot pay their living expenses and save for their retirements. NONE of these confiscated earnings are being paid by the politicians to the scapegoats, ie the wealthy. elites, bankers. etc, but according to the IRS 80% of the federal budget is being spent on entitlement programs for the proletariat, ie food stamps, disability, social security, medicare, obamacare, illegal economic invaders, etc etc, NOT the wealthy. elites, bankers. etc, etc. Socialism by the exploding horde of proletariat parasites is the huge drain sucking the life force and $$$ out of ordinary middle-class Americans, NOT the tiny minority of parasites at the top of the food chain operating their financial engineering schemes.

Do NOT follow this link or you will be banned from the site!