Wednesday, September 9, 2015

September 9 2015. Can I show some proof that the American Business Model is structurally flawed? Not to people who don’t believe there is an elephant in the room—even when they are sitting under the wrong end of it.




Nonfarm business productivity bar chart

Manufacturing productivity bar chart


What are the aspects that worry me most about the U.S. Economy?

On the face it, the U.S. economy is in fine condition—or so the media hype would suggest.

  • GDP Growth is sluggish—but is still there—with something between 2 and 3 percent being regarded as being reasonable for a mature economy. (Rubbish! The U.S. economy could do significantly better if it wasn’t structurally flawed).
  • The U.S. is currently virtually at 5 percent unemployment—the figure widely regarded as constituting full employment by many economists (NOT including me).
  • The dollar is strong—reflecting international confidence. No, it reflects international desperation because other options look worse.
  • The Stock Market is—? Well, let’s not dwell on the market (for the moment).  But..

"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges." -John Maynard Keynes

The trouble is that such indicators are both inadequate and misleading when it comes to evaluating the economy in the context of the quality of normal people’s lives (roughly 80 percent of the U.S. population). For instance:

  • As has been commented on in previous blogs, GDP is a grossly inadequate measurement of economic progress for a whole host of reasons including the basic fact that it doesn’t differentiate between good growth and bad growth (such as war—or growth based upon debt).
  • The unemployment figures have been so massaged that they are highly suspect—and in addition they fail to reflect that large numbers of employees are now being badly paid. The true unemployment figure would appear to be at least twice the official figure—which would put it over 10 percent. The low pay issue is widespread—and is proving to be remarkably resistant to “full employment” which suggests that there really isn’t full employment (because there isn’t).
  • The strength of the dollar has more to do with it being a reserve currency—and the technicalities of financialization—than with with the innate strength of the economy  in terms of international competitiveness and quality of life.

The following are just some of my concerns. This is one deeply sick economy masquerading as capitalism—or “Free Enterprise.” Would that such were true. It isn’t.

  • The underlying ethos of the current American Business Model (ABM). Pour yourself a drink and have a seat. This is going to be a long sentence—and a pretty long paragraph. Here goes: The ABM is currently a financialized, greed-driven, predatory, large corporation-dominated, monopoly-oriented system—closely interlinked with a corrupted political structure—run for the sole benefit of the ultra-rich (and the many who serve them)—which is a perversion of the competitive free-enterprise system which the U.S. is so proud of. It is focused on maximizing shareholder value—to the exclusion of almost everything else, lacks any sense of social responsibility, is entirely different to concepts like ‘The National Interest’ and ‘The Public Good,’ and demonstrably isn’t delivering for the American people. Above all, it lacks any moral code—something which is unacceptable in any kind of decent, civilized, society. Morality isn’t about religion or sex. It’s about treating each other as well as we flawed human beings can—so that society can progress to the advantage of all. Its standards are not particularly high. They can’t be because we are human. It is tolerant, understanding, pragmatic, and forgiving. It is about as different to the prevailing American Business Model as day is to night.  
  • The mindset of those running it. They are actually not very hard to understand. Greed and narcissism dominate. Decency is considered to be irrelevant. They use language like: “I’m an unashamed believer in unfettered capitalism.” Well put. They are unashamed. They do lack remorse. And so we get a nation in decline—with people fleeing the labor force in droves. Labor force participation is lower than it has been in years. Millions of Americans are not even trying to get work—because the game isn’t worth the candle.
  • The fact that more people aren’t worried about it. This rip-off of the U.S. is happening pretty much in plain sight—yet there seems to be no sense of outrage. It is truly mind-boggling! Are Americans so scared of losing their jobs they are politically frozen—or so drugged by legal drugs and entertainment they don’t care? So it would seem! Drombies rule!
  • The widespread ignorance of the voting (and non-voting) public.  It is impossible to have an effective democracy unless most people vote and have an understanding of the issues. In the U.S. the Right Wing persistently attempts to block people they think might have a propensity to vote Democrat from voting—and research shows a disconcerting ignorance of the issues. That’s a recipe for exactly what we’ve got—a confused and disillusioned public, and a gridlocked political system (except when the Right Wing needs to sneak in legislation that works to their advantage.
  • The deep ignorance of Americans of the rest of the world. This is an incredibly serious issue because it allows Americans to be delusional and to spout about the best country in the world—when other nations are leaping ahead. The U.S.mass media should be ashamed of themselves. Americans are very far from stupid—the population includes some of the smartest people on the planet—but they are inadequately informed. Not good. 
  • The lack of central economic planning. ALL of the U.S.’s international competitors plan. They don’t try and micro-manage like the Soviets used to—because that doesn’t work. By and large, they simply develop broad strategies which are then implemented by whoever seems likely to be the best at it.
  • The dubious quality of many of the statistics which underpin economic decision making.  Bad statistics make for bad decisions. The U.S. is normally very good on statistics and research, but the government figures are so massaged—sometimes for valid reasons—that it is becoming increasingly hard to know what the truth is. To make matters worse, even where people know that the figures are screwy, they tend to rely on them in the absence of anything else. They start believing their own lies. That sounds a little surreal—but it is no more than the truth of the matter.
  • Financialization. Financialization sucks most of us in by dangling the carrot of easy money—and then keeping us in debt for the rest of our lives. It’s a cradle to the grave service—albeit childhood is done indirectly (the parents get screwed to compensate). The end result is a sort of tax made up of interest rates, bank charges and fees which allows a relatively small group to be paid vastly more than the norm, an even smaller group to become ever richer—and most Americans to be bled, or screwed, or both.  Financialization should not be confused with having a viable financial system. That we need. It is about a necessary system being perverted by greedy people. As with so much, it is a matter of balance. Eating is a fine and necessary thing (try starving to gain the necessary perspective). Gluttony is gross. Financialization is financial gluttony. Capisce?
  • The bias of the Federal Reserve towards supporting the banks rather than focusing on the real economy. Lending money to the big banks at near zero interest rates so they can lend it on to the government at a profit constitutes a massive subsidy to the big banks—who were the prime cause of the Great Recession in the first place. And it has been going on for years. This is nuts! Why not bypass the banks and stimulate the country directly? Meanwhile, the big banks, as normal, grossly neglect the small business sector (and much else). The underlying point is that the Fed needs to be either re-thought or abolished.
  • The fact that the banks haven’t changed their ways as fundamentally as is required. In some very serious ways they haven’t changed their practices at all. If you have enough money you can create a situation where the rules don’t apply to you—or the rules are so weakened, they are ineffective.
  • The deeply suspect nature of the stock market. It will continue to do what such rigged markets do. It will entice, confuse, obfuscate, and betray under the cover of corrupt politicians, co-opted regulators, and a tissue of lies. It will make a small number of people extremely rich, fleece the savings of most ordinary Americans, and fail to do the job it purports to do. Like so much in the American Business Model at present, it is a good idea which has been perverted. 
  • Chronic underinvestment. The classic excuse that business leaders give is that there is inadequate demand—while concurrently paying most employees so badly that there is inadequate purchasing power (other wise knows as demand). Right wing ideology then prevents public investment—except where defense or corporate subsidies are concerned. This is ignorance compounded by arrogance—and the consequences are predictable.
  • The lack of productivity. If you underinvest and treat your employees badly your productivity will suffer. That is not rocket science.
  • The lack of international competiveness. If your productivity is poor, you wont be internationally competitive.
  • Lousy labor relations. This is an incredibly serious issue that isn’t much discussed because U.S. labor relations have been so bad for so long it is considered normal. In practice it puts the U.S. at a serious competitive disadvantage
  • The pervasiveness of low pay.  Low pay, fairly obviously, leads to lack of demand—because ordinary people don’t have the money to buy things. That is not the whole story—but it is a significant factor.
  • The pervasiveness of lack of demand.  Lack of demand leads to lack of investment because CEO’s argue that there is no point in investing if the demand isn’t there. This is a fallacious argument because business has a well proven ability to create demand—or to grab a larger share of what there is off the competition. But big business hates to compete. It is far too much like hard work. Monopolies are so much more social. How do you achieve them? You buy up the competition using money provided by the big banks. That is yet another negative consequence of financialization. It is innately monopolistic.
  • The neglect of manufacturing. This started when Corporations were allowed to shut down factories and export jobs—and expertise—at will and the manufacturing economy has never really recovered.There is a real need for a National Manufacturing Strategy and for vastly more investment. Business has the money—but is investing in share buy-buybacks. This is no way to run anything—let alone an economy. Judas Priest—this is obvious! Go march and complain!
  • The rigged taxation system. This is so blatantly rigged that the ultra-rich pay a much lower percentage of their income in tax than the relatively poor. They do that because they have bought Congress. That is a little crude but it is the essence of the situation. It’s unjust and may well be unconstitutional. It is a pretty good way of demotivating the bulk of the U.S. workforce.
  • The transfer of risk to the individual. The government and larger corporations are much better equipped to withstand risk than individuals. They have resources that individuals do not have. They can print money, borrow it cheaply—and invade other countries. They can steal it—and often do.Nonetheless, the Right Wing have largely blocked Congress from helping the less well off—and corporations have been busy eliminating well-paid jobs, closing down factories, abolishing the defined pension, and putting more of the healthcare burden onto their employees—while continuing to squeeze their pay. This sucks—and is just not right.
  • The wildly excessive costs of healthcare. This single catastrophic weakness alone is sufficient to put the U.S. at a competitive disadvantage—but is is compounded by the fact that Americans live sicker and die sooner. More than two years sooner! 
  • The wildly excessive costs of National Security. Over a trillion dollars a year is being syphoned out of the economy—5 to 6 percent of GDP and the net result seems to be that we get into wars we don’t win, vast numbers of people are killed, maimed, and have their lives wrecked—and a few of the ultra-rich get even richer. It’s a very sick situation.
  • The deeply corrupt political system—now a plutocracy rather than a democracy. This isn’t just my opinion. There is a great deal of research that comes to exactly that conclusion. The U.S, has turned into a one dollar one vote economy.
  • The quality of the food chain. My suspicion is that this is a more disturbing situation than is generally understood. Intellectually, we know there is a direct relationship between how we eat and how we function (which includes thinking)—and we know that the U.S. diet overall is very poor—but we don’t seem to have joined the dots.
  • The breakdown of trust.  The research is very clear that Americans, as a whole, no longer trust their institutions—and have least trust of all in Congress. Since some degree of trust is essential for cooperation—the system no longer works properly. What a surprise!
  • The lack of social capital. Social capital is based upon trust, and it is how you get things done. The Right Wing have deliberately, systematically, and scientifically undermined it with the best propaganda money can buy—and have been so successful that Americans now distrust almost everything and everybody except, apparently, the military and the police. That’s about as unhealthy a situation as can be imagined. It’s pretty much the kind of environment which brought Hitler to power—and remember, he was elected.

You may well ask why I haven’t put debt on the listand at the top at that. Well, that is because federal government debt is very manageable if you have a reserve currency—and I see it more as a symptom than a cause.

That isn’t to say that present situation isn’t out of hand—but more than if you fixed other aspects, federal debt would become manageable. The budget could even be balanced fairly easily—if the system wasn’t rigged.

As matters stand, the major corporations have now been provided with so many loopholes, their contribution towards the tax base has dropped by two thirds—and the rich have so many tax breaks even billionaires pay tax at a much lower percentage than normal Americans.

Doesn’t that strike anyone as being  a little odd?

State and local debt is a more serious problem. Let me just quote a movie title as comment. THERE WILL BE BLOOD. We’re going to see more defaults and reneging on pension contracts in the years ahead.

U.S. Consumer debt is a nightmare because debt is increasing while earnings are in decline—once inflation is factored in. This is an unsustainable situation which is sucking demand out of the system as a whole. I would add that—one again—there is a problem with the statistics. The official inflation figures as expressed in the CPI do not reflect reality as far as most consumers are concerned. The real figure is higher.

It seems to me that we are heading towards a decidedly problematic period which is highly likely to turn into another recession as soon as 2016. I don’t think it is inevitable—just likely. I say that based upon the underlying structural problems. The U.S. economy is wobbly. I have no crystal ball.

What might precipitate such a recession?

  • The Fed raising interest rates.
  • The cumulative impact of the slowing down of the Chinese economy which is rippling right through the global economy and represents a significant drop in global demand. Unless that shortfall is made up, there just have to be adverse consequences.
  • The inherent instability of the stock market—which is both overvalued and buoyed by phony market conditions (with share buybacks leading the pack). Buybacks apart, you would be less than wise to trust most corporate balance sheets. Vast corporate resources are devoted to financial engineering which is also known as fiddling the books. Language is a many splendored thing! It’s a great American tradition (though scarcely a U.S. monopoly).
  • Some kind of Black Swan (unexpected event) can be expected. True, we mightn’t know the form in which it will appear (it never looks like a Black Swan—just in case you were wondering) but we absolutely know that things go pear-shaped at frequent intervals so that building resilience into our systems is a really good idea. Do we? No. Instead, we let the banking system play roulette yet again—on a scale which would make that genius of mime,Marcel Marceau, blink! And he’s dead!

Let me quote from a piece from William Edstrop featured in

Footprints. The US government has paid wall street’s way when wall street can’t pay it’s own way. Wall street has promised to pay more than the US government has promised to pay. $0.5 trillion in margin loans and $3.95 trillion in repurchase agreements pale in comparison to $21 trillion in open credit default swaps, a type of derivative. Bankruptcy legislation in 2005 gave derivatives “super priority” status to be paid first when banks go bankrupt.

According to BIS, there were $630 trillion in outstanding derivatives earlier this year, about half in the USA. Since wall street doesn’t have $315 trillion to pay their derivatives, who will pay this amount? And how?

Even if only 15% of US derivatives go bad, that’s $47 trillion. How would the US government pay for that? The derivative liabilities arising, due to ongoing wall street instability, is an elephant in the room.

There is a great deal that could be done to prevent another recession—starting off with fixing the economy’s structural problems—BUT there are few signs that these deficiencies are recognized, let alone being resolved.

Above all, ideology is getting in the way—and that has a well proven ability to turn reasonably intelligent people into jackasses.

Add greed to the mixture and you’ve got what precipitated the Great Recession. Factor in such exotic financial instruments as derivatives—which few people understand adequately (let alone their consequences) and you’ve got the find of instruments which could create a domino effect right through global finance.

I think I need a drink!

Chart Of The Day: Since 12/2007------ 1.5 Million More Waiters/Bartenders, 1.4 Million Fewer Mfg. Jobs

Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition of 1.5 million waiters and bartenders.

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