The horizon is not so far as we can see, but as far as we can imagine

A few notes on the economy

1) While job growth is decent in the US, the essential job picture remains unchanged.  The percentage of adults with jobs is still about where it was after the financial crisis, and wages are flat.  The last US job report was good, but wages dropped.  That is not an indication of a good job market.

2) The Eurozone is flirting with deflation, and commodities have heavily deflated (almost all of them, not just oil).  This is due to reduced demand.  Reduced demand is bad.  Let me repeat, bad.

3) The reason there is reduced demand is because most people are poorer than they were pre financial crisis, and governments are engaged in austerity.

4) The stock market is a ponzi scheme.  Its prices are justified by the fact that corporations are being given essentially free money by the Fed (directly or indirectly) and allowed to engage in oligopoly pricing of services which people must have (like the internet, or phone service).  This has led to high profits, and some of those profits are pumped back into the stock market, which is in executives interests, so they can cash out their options at a profit.

5) The entire gain of this business cycle has gone to the top 10%, and by the top 10% we really mean to the top 3% or so, with the .1% and .01% being the real winners.  The bottom 90% has lost ground.

6) Rich people buy securities.  The middle class and below buy goods.

7) While low oil prices are good for many countries, that they are driven by soft demand is not good.

Predicting this economy remains difficult because it is driven by the decisions of a very few people.  Less than a hundred worldwide are key.  The people who can create money, as credit, are key.  They are almost completely unhinged from the economy as a whole: money creation is fiat, and being treated as such.

The great realization of the financial crisis was “hey, we can just create money and give it to the people we approve of and no one can stop us.”  The people they approve of, unfortunately, are rich people playing ponzi games.  Giving money to bankers who don’t lend to the regular economy (and why would they, regular people aren’t getting raises and don’t have vastly inflated housing prices) does very little for the economy that most people live in.

This leads to strong relative gains: not only are the rich richer, but everyone else is poorer.  Austerity lets them buy up oligopolistic assets at fire-sale prices (see dismantling of the NHS in England for an example.)  Their money increases, their relative power increases, and these policies are a win for them.

The thing is, hardly anyone has pricing power except people who are in an oligopolistic position.  It makes no sense to loan money right now to anyone who doesn’t have pricing power, because they can’t pay it back.

There will be; there are, ways out of this. But they do require creating actual pricing power for the masses, breaking up oligopolies and dealing properly with the energy problem.  The creation of some actual competitive markets (gasp!) combined with allowing anyone but the rich to have pricing power would do wonders for the world economy.

But that isn’t something your lords and masters want.  The current situation suits them perfectly—compared to everyone else they are getting richer and more powerful.  There is no reason for them to change how they are doing things.

Or is there?  The resource barons are hurting, and they will want changes.  But I doubt they are willing to see anything like widespread prosperity as a solution, because it would lead to a long term collapse of many of their fortunes, rather than a boom and bust cycle which the smart resource barons are perfectly capable of riding and using to their advantage.

Until the calculus of the powerful is changed, or they lose their power, while there will be ups and down the basic feature of the economy of the developed world (Depression) will not change, and the rest of the world will continue to suffer through huge boom bust cycles.

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  1. Trixie

    Great overview, Ian.

    Said another way (how predictable am I?), it’s the distribution (or lack thereof). And it’s the direct result of the way we manage (only half) the business cycle:

    If gov is going to fight recessions by propping up output and prices (including those of assets), then counter-intuitively, gov stabilization policy also has to fight expansions to ensure growth is broadly shared. This results in stronger and more sustainable growth in the long-term, as opposed to asset and credit bubbles. It’s what we did in the post-war economy using the usual suspects: high marginal tax rates, excess profit tax, and labor bargaining power via unions. That was the “social contract”: Gov props up capital in downturns; capital props up labor during expansions. In other words, you maintain the wage share of GDP throughout the business cycle, which mean the median wage has to increase during recoveries with corps earning less profit than they would without wage support. Otherwise, it’s during expansions that the middle class disappears, which is exactly what’s been going on for decades now. The data is very clear, so I have no idea why this is so controversial. And it is. Because Marxism. Or something.

    There are lots of problems in any given economy, but a chronic lack of demand should never be one of them since that can only happen when you underpay and overprice workers while the top continues to collect massive rents. And you can’t keep throwing money at it since we know the gains will accrue to capital instead of labor. “Too much capital chasing too few productive investment opportunities” only ends in tears. And bubbles. Rinse/repeat by only managing half the business cycle because we have to pretend we don’t know how to do anything else, and here we are. Ta-da!

    The latest G20 panacea — public infrastructure spending — is a no-brainer for those countries that need it. But even here, the last thing the world needs is more productive workers if they’re not going reap the gains of increased productivity. This only exacerbates the structural imbalances instead of resolving them. The global savings glut, which is the mirror image of the global debt glut, is real. And its the distribution (or lack thereof) of these gluts that matter. A lot.

    Here’s some chart porn telling a similar story for those so inclined. In almost all cases, notice the unmooring (is that a word?) beginning in the 80s when we decided it was a great idea to throw all the econ gains at the top because trickle-down:

    Wages vs Profits:



    Wages vs Hshld Debt:

    Productivity vs Median Wage:


    Labor Share:

    Trade Balance:


    Gini Ratio:


    Capacity Utilization:

    QE deposit creation instead of bank lending:

    Velocity (M2):

    Which all leads to — drum roll, please — a “lack of aggregate demand” via soaring inequality:

  2. Scott Nance

    If John Robb is right (and he always is) the whole house of cards is about to get smashed, courtesy of ISIS (with a strong assist from our lords and masters).

  3. Good point On expansions, Trixie.

    John Robb? if you say so… but he’s been saying an awful lot of wrong things for someone who is always right.

  4. Monster from the Id

    The profit motive is like fire.

    Properly controlled, it is essential to the building and maintenance of civilized society.

    Without control, it is lethally destructive.

  5. Monster from the Id

    We did control it for a while in the USA, but the “pyromaniacs”, so to speak, managed to get control of the political system.

    They accomplished that largely by exploiting the human psychological weakness of tribalism–most prominently the variety of tribalism called “racism”, but they certainly used, and still use, other varieties as well.

  6. roadrider

    But, but, but – Obama’s popularity is rising …

    at least that’s what the professional courtier class of “journalists” think is the most important thing.

  7. Monster from the Id

    Hey, Roadrider! It’s a pleasure to meet you at last! I remember spending so many Saturday mornings watching you outwit that poor silly coyote…oh, wait; that was someone else. :mrgreen:

    As for the “professional courtier class of journalists”, don’t you mean “professional courtesan class of journalists”? 😉

  8. Nick


    Does anyone have a reliable understanding of whether we can find a suitable energy alternative to oil and coal? Archdruid Report has a recent post stating that renewable energy resources are simply not able to produce energy as inexpensively as fossil fuels (in other words, it costs too much to produce the technology and the payoff is too small for the investment).

    Ultimately, it seems renewable energy is just some way of harvesting the energy we receive from the Sun, and I don’t know if we can capture enough Sun energy in an efficient way without covering the Earth’s surface with solar panels. Surely someone has calculated how much energy we can realistically harvest, and at what cost. Any thoughts?

  9. V. Arnold

    @ Nick

    IMO, your statement and subsequent question are in large measure a part of the problem.
    They exhibit a large degree of buying the party line/propaganda. And a lack of critical thinking and self education.
    In stark terms, there is no choice! Period! We find alternatives to fossil fuels AND self educate on how to conserve/reduce consumption or we die.
    Wind, solar (many choices there, not just solar panels, nuclear (not our stupid, antiquated technology), and reduced consumption.
    As an example; I live in the tropics (40+°c in the summer) and have no air conditioning. We shade our house by thoughtful placement of large dense trees. Our house is surrounded by a yard planted with a very hardy Malaysian grass and not concrete (as is customary here).
    In other words, we have to change our life styles and find alternative ways of living.
    The coming world will demand we are pro-active, not docile followers.
    Do or die!
    Cheers with your new view of your future…

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