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The Warren Buffet Economy, Part 4: Why Its Days Are Numbered
Submitted by David Stockman via Contra Corner blog,
As documented previously (Part 1, Part 2, Part 3), the Fed has generated a $50 trillion financial bubble since Alan Greenspan took the helm in August 1987. After 27 years, honest price discovery has been destroyed, thereby reducing the nerve centers of capitalism - the money and capital markets - to little more than gambling casinos.
Accordingly, speculative rent-seeking in the financial arena has replaced enterprenurial innovation and supply side investment and productivity as the modus operandi of the US economy. This has resulted in a severe diminution of main street growth and a massive redistribution of windfall wealth to the tiny share of households which own most of the financial assets. Warren Buffett’s $73 billion net worth is the poster boy for this untoward state of affairs.
The massive and systematic falsification of asset prices which lies at the heart of this deformation of capitalism is a direct and unavoidable consequence of monetary central planning. That is, the pursuit of Keynesian business cycle management and stimulus through central bank interest rate pegging and massive monetization of existing public debt and other securities—-especially since the latter has no purpose other than to artificially goose the price of bonds and lower their yields; and also via other indirect methods of financial asset levitation such as the Greenspan/Bernanke/Yellen doctrine of wealth effects and the implicit central bank “put” which underpins the economics of buy-the-dip speculators.
As previously indicated, the Keynesian bathtub model of a closed, volumetrically driven economy is a throwback to specious theories about the inherent business cycle instabilities of market capitalism that originated during the Great Depression. These theories were wrong then, but utterly irrelevant in today’s globally open and technologically dynamic post-industrial economy.
As reviewed in Part 3, the very idea that 12 people sitting on the FOMC can adroitly manipulate an economic ether called “aggregate demand” by means of falsifying market interest rates is a bad joke when in it comes to that part of “potential GDP” comprised of goods production capacity. In today’s world of open trade and massive excess industrial capacity, the Fed can do exactly nothing to cause the domestic steel industry’s capacity utilization rate to be 90% or 65%.
It all depends upon the marginal cost of labor, capital and materials in the vastly oversized global steel market. Indeed, the only thing that the denizens of the monetary politburo can do about capacity utilization in any domestic industry is to re-read Keynes’s 1930 essay in favor of homespun goods and weep!
As I detailed in the Great Deformation, the Great Thinker actually came out for stringent protectionism and economic autarky six years before he published the General Theory and for good and logical reasons that his contemporary followers choose to completely ignore. Namely, protectionism and autarky are an absolutely necessary correlate to state management of the business cycle and related efforts to improve upon the unguided results generated by business, labor and investors on the free market. Indeed, Keynes took special care to make sure that his works were always translated into German, and averred that Nazi Germany was the ideal test bed for his economic remedies.
Eighty years on from Keynes’ incomprehensible ode to statist economics and thorough-going protectionism, the idea of state management of the business cycle in one country is even more preposterous. Potential labor supply is a function of the global labor cost curve and now comes in atomized form as hours, gigs, and temp agency contractual bits, not census bureau headcounts.
In fact, the Census Bureau survey takers and the BLS numbers crunchers have not the foggiest idea as to what the real world’s potential labor force computes to, and how much of it is deployed on any given day, month or quarter. Accordingly, printing money and pegging interest rates in pursuit of “full employment”, which is the essence of the Yellen version of monetary central planning, is completely nonsensical.
Likewise, the Fed’s current “soft” target of 5.2% on the U-3 unemployment rate is downright ridiculous. When in the year 2015 you have 93 million adults not in the labor force—-of which only half are retired and receiving social security benefits(OASI)—-and a U-3 computational method that counts as “employed” anyone who works only a few hour per week—-then what you have in the resulting fraction is noise, pure and simple. The U-3 unemployment rate as a proxy for full employment does not even make it as primitive grade school economics.
At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.
By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!
Yes, we have to allow for non-working wives, students, the disabled, early retirees and coupon clippers. We also have drifters, grifters, welfare cheats, bums and people between jobs, enrolled in training programs, on sabbaticals and much else.
But here’s the thing. There are dozens of reasons for 180 billion unemployed labor hours, but whether the Fed is monetizing $80 billion of public debt per month or not, and whether the money market interest rate is 10 bps or 35 bps doesn’t even make the top 25 reasons for unutilized adult labor. What actually drives our current 43% unemployment rate is global economic forces of cheap labor and new productive capacity throughout the EM and dozens of domestic policy and cultural factors that influence the decision to work or not.
To be sure, for a brief historical interval—-from roughly the New Economics of the Kennedy Administration to the 2007 eve of the housing crash and financial crisis—- the Fed did levitate the GDP and meaningfully impact the labor utilization rate. That was owing to the one-time trick of levering up the household and business sector through the inducements of cheap debt.
But that monetary parlor trick is over and done. Household’s are still de-levering relative to income, and the Fed’s bubble economics have channeled incremental business borrowing almost entirely into the secondary market of financial engineering. That is, borrowings which are applied to stock buybacks, M&A deals and LBOs result in a re-pricing of existing equity claims and more gambling stakes in the casino, but do not add to demand for new plant, equipment and other tangible assets.
So the transmission channels through which monetary central planning could historically impact the labor utilization rate are now broken and done. The Fed’s default business, therefore, is inflating the financial bubble and subsidizing carry trade speculators. That’s all there is to monetary policy at the limits of peak debt.
In that context, consider the complete foolishness of school marm Yellen’s campaign to fill up the bathtub of potential GDP by causing labor utilization to reach full employment. And start with the case of non-monetized labor.
Back in the 1970s during one of those periodic debates about full-employment, legendary humorist Art Buchwald proposed a sure fire way to double the GDP and do it instantly. That was in the time that most women had not yet entered the labor force and politically incorrect discussion was still permitted on the august pages of the Washington Post.
Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers factored into the labor force and their contribution to the economy’s real output in the labor utilization rate.
As a statistical matter—-even though four decades of women entering the labor force have passed since Buchwald’s tongue-in-cheek proposal—- there are still approximately 75 billion un-monetized household labor hours in the US economy. Were they to be counted in both sides of the equation, our 43% unemployment rate would drop to 25% for that reason alone.
Needless to say, whether household labor is monetized or not has no impact whatsoever on the real wealth and living standards of America, even if it does involve important social policy implications. The point is, as an economic matter Janet Yellen can’t do a damn thing about it, even as she dithers about asking Wall Street speculators to pay 35 bps for their overnight borrowings.
And the same thing is true for almost every single factor that drives the true hours based unemployment rate. Front and center is the massive explosion of student debt—now clocking in at $1.3 trillion compared to less than $300 billion only a decade ago. The point is not simply that this debt bomb is going to explode in the years ahead; the larger point is that for better or worse, Washington has made a policy choice to keep upwards of 20 million workers out of the labor force and to subsidize them as students.
Whether millions of these debt serfs will get any real earnings enhancing benefits out of this “education” is an open question—–one that leans heavily toward not likely in either this lifetime or the next. But these 40 billion potential labor hours are far greater in relative terms than under the stingy student subsidy programs which existed in 1970 when Janet Yellen was learning bathtub economics from James Tobin at Yale.
Likewise, there are currently about 17 billion annual potential labor hours accounted for by social security disability recipients. Again, that is a much larger relative number than a few decades back, and it is owing to the deliberate liberalization of social policy by Congressional legislators and administrative law judges. The FOMC has nothing to do with this form of unemployment, either.
Then there is the billions of potential labor hours in the un-monetized “underground” economy. While the work of drug runners and street level dealers is debatable as a social policy matter, it is self-evident that state policy—–in the form of the so-called “war on drugs” and the DEA and law enforcement dragnet—–account for this portion of unutilized labor, not the central bank.
The same is true of all the other state interventions that keep potential labor hours out of the monetized economy and the BLS surveys—-most especially the minimum wage laws and petty licensing of trades like beauticians, barbers, electricians and taxi-drivers, among countless others.
Finally, there is the giant question of the price of labor as opposed to the quantity. And here it needs be noted that “off-shoring” is not just about shoe factories and sheet and towel mills that went to China because American labor was too expensive. Owing to the rapid progress of communications technology, an increasing share of what used to be considered service work, such as call centers and financial back office activities, have already been off-shored on account of price. And that process of wage suppression has ricocheted into adjacent activities owing to the willingness of off-shored workers to accept lower wages in purely domestic sectors when push comes to shove.
Indeed, the cascade of the China “labor price” through the warp and woof of the entire economy is so pervasive and subtle that it cannot possibly be measured by the crude instruments deployed by the Census Bureau and BLS.
In short, Janet Yellen doesn’t have a clue as to whether we are at 30% or 20% unemployment of the potential adult labor hours in the US economy. But three things are quite certain.
First, the real unemployment rate is not 5.5%—–the U-3 number is an absolute and utterly obsolete joke.
Secondly, the actual deployment rate of America’s 420 billion potential labor hours is overwhelmingly a function of domestic social policy and global labor markets, not the rate of money market interest.
And finally, the Fed is powerless to do anything about the real labor utilization rate, anyway.
The only tub its lunatic money printing policies are filling is that of the Wall Street speculators. And that’s what the Warren Buffett economy is actually all about.
In Part 5, the possibility that the free market in finance could function just fine without activist monetary policy intervention and bubble finance fortunes like Warren Buffett’s $73 billion will be further explored.
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Stop being cynical and just enjoy the Recovery Bitches..
joyflation
Do we, the proletariat, have a choice but to watch our wages level out with the rest of the worlds proletariat? Can protectionism (our government) stop this or will others just compete us out of business with lower wages as we slowly wither on vine refusing to compete, feeling we deserve better. What is the answer to save our lifestyle, or is this as good as it gets...til it gets worse? And if so, should there be a plan to make this decaying transition as painless as possible?
We do make some stuff the world wants (acft, heavy equip, machinery, tech soft/hard, agri, pharma, med equip, wpns/sysem, mining, ) but making that stuff requires less than a 1/4th of our current work force.
I don't care about any of this, I just had to log in to complain, STRONGLY, about being forced to see Janet in a tub. How does one wash one's eyes out?
Imitation is the sincerest form of flattery.
I liked the articles. Looking forward to #5.
What's the medicine?
I wish, sometimes, I could unlearn this stuff....and blissfully enjoy life.
"..there is always soma, delicious soma, half a gramme for a half-holiday, a gramme for a week-end, two grammes for a trip to the gorgeous East, three for a dark eternity on the moon...", "All the advantages of Christianity and alcohol; none of their defects." Huxley "A Brave New World"
Imitation is the sincerest form of flattery.
TwoHoot,
Are you one & same that I "Imagery" know from iv and STX? If so, glad to have you. The country needs more like you voicing.
Keynesians claim government debt doesn't matter, Bruce Jenner claims to be a woman, Rachel Dolezal claims to be black, Elizabeth Warren claims to be a blue eyed Indian, Obama claims no one is spying on you and is a constitutional scholar.
I'm claiming to be a Martian.
So the green around the gills, is natural?
That would be correct!...lol.
As an aside (just cuz its one of those odd things that occasionaly transit my mind) how weird is it going to be on Fathers Day at Bruce Jenners house? ;-)
“ In today’s world of open trade and massive excess industrial capacity, the Fed can do exactly nothing to cause the domestic steel industry’s capacity utilization rate to be 90% or 65%”
This is a true statement; the U.S. and West no longer have fiscal policy to then target wanted “strategic” industries. Monetary policy by the FED is not long term strategic, is is more tactical, QE simply monetizes financial assets. Non-bank actors, the shadow banks get their TBills ripped from them, and private banks have their debt instruments swapped for Fed keyboard money.
The U.S. got rich behind protective tariffs; this so her domestic industry could develop. During the years 1700 to 1900 the U.S. money supply had a lot of base money in it (Treasuries) issued as seigniorage. It also had lots of Gold and Silver shooting out the ground, to then get monetized.
“Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers factored into the labor force and their contribution to the economy’s real output in the labor utilization rate.”
Wow, what an idiot. Since when does the whole economy need to be monetized? Humans evolved with gift economies. The reason it must be monetized is to pay off the increasing demands of debt instruments. Fix the money you dope economists. We need to shit can the debt money system. Now humans only look at their neighbor and wonder how much money they can get out of them.
“The only tub its lunatic money printing policies are filling is that of the Wall Street speculators. And that’s what the Warren Buffett economy is actually all about”
Hey Stockman, how about a little perspective. QE is endogenous money created by the private banking system. It is keyboard money that chases after financial assets. As such it empowers Oligarchy and enriches those that already held financial debts and paper. QE is a swap of types, which changes the composition ratio of the money supply.
To pay off debts you need EXOGENOUS money, which comes from outside of the private banking system. In the past to pay off debts, Countries engaged in Mercantilism; to then grab money from other economies (usually Gold). This collapsed other economies and led to war. Debts have to be haircut by law, or paid down. You cannot pay them down with more future debt.
With regards to Nazi Germany, and how they got out of debt, Schacht issued MEFOBILLS. These were a three party bill that acted as credit on the books of major industrial concerns (for armaments.) Once the goods were produced, the bill was presented for discounting (to be turned into general purchasing power). In this way EXOGENOUS money entered the money supply and goods were produced in direct correlation. The Reichsbank guaranteed Mefo Bills and they paid interest. The interest fluxed OUT into the money supply rather than being sucked into finance. Later tax rolls increased and the money collected could be spent or not, to thus prevent inflation.
The Germans worked their way out of debts.
Stockman, I’m really looking forward to your “fixes” for the economy.
“Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers factored into the labor force and their contribution to the economy’s real output in the labor utilization rate.”
Then you write, "Wow, what an idiot."
No. He is not. Look in the mirror.
You DID NOT READ THE ARTICLE.
Art Buchwald was a SATIRIST. He wrote SATIRE...what so many here mistakenly believe as sarcasm.
This article even STATED THE FACT THAT BUCHWALD WAS A HUMORIST DIRECTLY BEFORE THE QUOTE.
...legendary humorist Art Buchwald proposed a sure fire way to double the GDP and do it instantly.
Note the word LEGENDARY.
It was his method of DOUBLING GDP overnight.
It is just like Jonathon Swift's solution to the Irish Potato Famine, in his epic work, "A Modest Proposal" was to have the Irish breed and then eat their own babies to avoid starvation.
Obviously Art Buchwald did not mean that was a valid solution and was RIDICULING the idea of the reported, official GDP...even way back in 1970.
You must be one of those Gen X'ers or perhaps even a Millenial, as you are obviously too young to remember READING Art Buchwald's biting Satire of events during that inflationary period.
If you are older then it demonstrates your ILLITERACY as you did not READ the published information of the times, the best available, as there was still some good journalism back then. So you must have preferred that the One Eyed Mind Sucker was your source for your education.
So which case is it?
(Personally I sought out Buchwald's op-eds, republished in the Editorial Pages of the San Diego Union while I was a teenager. It always gave me a great laugh. In fact it was very influential in my development of my style of writing. I utilize satire quite a bit on these pages. However I have not even come close to achieving his style of writing.)
It is clear that you failed to read this article...or comprehend it.
So as I wrote...Look in the mirror, idiot.
Allow a man to wallow like a pig in his own ignorance once in a while.
OH MY!!
At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.
By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!
"if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort."
We have had and still do have less than a 80% HS graduation rate. That's 1,200,000 dropouts per year. 16 to 68 is 52 years x 1,200,000 = 62,400,000 HS dropout workers. Why is there inequality? Why must we import quality workers? This multiplyer is hammering us both socially and productively.
Imitation is the sincerest form of flattery.
So is being a douche repeating the same absurd line Ad Infinitum.
problem is the majority of good paying jobs have been moved to China decades ago, courtesy of Big BIZINESS.
But don't let reality interfear with your fantasy, please continue.
The labour demand curve, as they say, is downward sloping. Even if our masters weren't determined to see white Americans in hell, wages and prices in the USA would have to drop a good 40 per cent before they would seriously consider bring more than a small fraction of manufacturing jobs home.
Not just wages either, also regulation and environmental controls
What if what is happening is exactly what the owners of the Fed intend?
Look, it's pretty basic, if you have legal tender, tokens of exchange, currency - $s, loaned into existence at interest, and further loan-at-interest created 9/10 [with 1/10 allegedly not created out of thin air, but taking some other depositor's $ and lending *that*]
You can be sure of three things:
1. There will always be more debt than currency with which to pay the debt;
2. The rate of the growth of debt will accelerate relative to the growth of currency.
3. The value of each unit of currency will decline in an accelerating fashion, roughly the inverse of the ratio of the growth of debt/currency available to pay.
You may add to this the growth of a financial sector which in essence derived $ now, for future promises to pay, massive borrowing by .gov and raiding of Social Security {a program, whether you like it or not, that could have been sustainable for quite some time to come with sensible investment of the principal instead was raided and replaced with IOUs from the same poor bastard taxpayer who was jacked to provide for his own retirement - cute.} - massive elective wars that increased the need to borrow as well as to replace equipment and rearm, massive illegal immigration couple with social benefit "rights" themselves largely derived from borrowing, increasingly large scale legal work visa H1B immigration coupled with blue and white collar offshoring...
The top items are inexorable. The later ones decisions made by the ruling kleptocrats.
Country is like a slowly sinking ship, all the goodies are being loaded onto the life boats, and for the most part the passengers are fighting amongst themselves over trivia, letting it all happen.
Where are the life boats headed to is a good question to ask.
At my prior place of employment, I knew the end was near when people at the top jumped ship, and no one replaced them, regardless of what HR was spewing.
" A rising tide lifts all boats" yeah well what about the leaky boats that have holes in them?
Pyramid
https://www.youtube.com/watch?v=954fpwfCKaU
Is that Mr. Yellen in the bathtub?!!
EYE BLEACH!!!! NOW!!!!!!!
Nowhere in this so called "analysis" did I ever see the word "military" or "military spending" or "Pentagon spending" or "the millions of dollars sent to Israel" or "the millions paid to Egypt, Pakistan, Afganistan", yet the writer doesn't forget to amention the disability benefits. Stop the Military-industrial-entertainment complex and USA wll have trillions of dollars. It's SO simple. Yet all we get is some Libertarian BS. ZH is full of it.
So-called "monetary central planning" is another euphemism for triumphantly ENFORCED FRAUD.
Although David Stockman provides some interesting analysis of the economic problems, which are correct on the level that he conducts that analysis, that level is still TOO SUPERFICIAL, and therefore, the "solutions" which are implied by that superficial analysis are bogus.
The ABILITY to engage in "monetary central planning" was due to the persistent and prolonged application of the methods of organized crime to the political processes, which resulted in governments enforcing the frauds of privately controlled banks. That privately controlled banks CAN legally counterfeit the public "money" supply had a history described by many, including these quotes from Carroll Quigley:
"powers of financial capitalism
had another far-reaching goal,
nothing less than to create a
world system of financial
control in private hands
able to dominate the
political system of
each country and
the economy of
the world as
a whole ..."
That system was "to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements. ...The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. ... It must not be felt that the heads of the world's chief central banks were themselves substantive powers in world finance. They were not. Rather they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up, and who were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks."
Central bankers work like organized crime works.
In my view, the more one learns about that, the worse it gets. That is especially so because IF one is willing to face the facts sufficiently, THEN it becomes painfully obvious that any real resolutions of the real problems require continuing to operate inside of the context of the principles and methods of organized crime.
Therefore, when Stockman concludes:
THAT promotes impossible ideals which side-step the deeper issues regarding the ways that civilization is necessarily controlled by the application of the methods of organized crime. The systems of symbolic robberies that the banksters have been able to operate, through them being able to corrupt governments to enforce those banksters' frauds, have already robbed almost everything worth robbing. Hence, it is way too late to return to the "rule of law" AFTER that "rule of law" has been psychotically crazy for more than a Century. Furthermore, to follow through on that same de facto point, there is an inherent paradox built into any enforcement of the "rule of law" which is that Nobody Guards the Guardians.
The only things which exist are the dynamic equilibria between different system of organized lies operating robberies, and therefore, the only realistic resolutions must be to change those. David Stockman provides a good, but superficial, analysis of the problems driven by "monetary central planning," HOWEVER, he does not address the deeper reasons how and why that exists due to triumphantly ENFORCED FRAUD.
REALISTIC RESOLUTIONS OF THE REAL PROBLEMS SHOULD BE BASED UPON PROMOTING SOLUTIONS WHICH ARE CONSISTENT WITH THE CORRECT ANALYSIS, WHICH MEANS NOT ONLY FACING THE FACTS THAT THE ESTABLISHED SYSTEMS ARE BASED ON ORGANIZED CRIME, BUT ALSO THAT ANY GENUINE SOLUTIONS WILL HAVE TO CONTINUE TO BE SO!
that yellen in a tub photo done got me SPRUNG.
I gots to satisfy my needs.
Any volunteers?
I think Lagarde is available
The feds should regulate/subsidise the price of gasoline it would probably have a bigger impact on the economy than managing the cost and supply of money which only benefits the 1%ers. A lower gas price would put cash into the economy at grassroots levels. I can hear the howl from here!
Tyler you evil man, that picture of Yellen in the bath just made me vomit into my mouth.
Regardless what central bank representatives are saying they are not at all interested in managing employment. And they are also not interested in managing inflation. Whatever they say is only said to disguise their true intentions. There only purpose is to manage the interest rates and to thereby facilitate the asset bubbles. Central banks in their present format need to be abolished.
As Warren Buffet said "His class has gone to war and they are winning"
The odds aren't in his favour in the long term though, the 0.01% against the 99.99%.
Czar Nicholas II and Louis XVI are good indicators of their prospects.
The only thing worse than seeing king Hillary (evidently she has the testicles in the family) in that damn pantsuit again is the thought of her without it. I think I just threw up in my mouth a little.
Did you read the paragraph in Part 1 about Wage Growth compared to Buffet's asset growth "adjusted for inflation? "
How do you adjust 0.03% growth over 27 years for inflation?
You guys missed the punchline on that one.....things are much worse than you thought.
Historically his class wins right up to the point where one of them suggest the masses "eat cake" because there is nothing else as all assets have been sucked dry by the .1%.