The Cheap Credit Trap

The Federal Reserve is making noises about cutting interest rates for the first time in several years. The reason is the trade dispute with China and now Mexico is potentially having an impact on the global economy. Even though it is only a signal of an intention, markets rallied on the news. Global investors and their robot traders love cheap credit from the Federal Reserve, so anytime there is the promise of more cheap credit, there is a rush into equities. It is a reminder of what actually drives stock indices.

It used to be that recessions were seen as a correctives for the system, as they eliminated unproductive and parasitic elements from the economy. In good times, all sorts of inefficiencies are tolerated, as everyone is making money. When times get tight, everyone gets serious again. Inefficient businesses and industries fail, thus putting those resources into more productive areas. The recession was the economy’s way of policing itself, so it was considered a necessary, if unpleasant, feature.

No one thinks like that today. Any sign of a downturn produces panic, especially among office holders. Part of it is no one has any respect for office holders, so voters will look for any reason to throw the bums out. For people who live off the public, losing an election is worse than death. Another part of it seems to be the sense among the ruling classes that they have only a tenuous grip on power. This is a bread and circus world now and they better make sure both are in ample supply.

That’s all speculation, of course, but it’s also a reminder of the long running problem that no one can figure out how to remedy. That is the interest rate trap. Lowering rates to address a slowing economy or a financial crisis is easy. Raising the rates back up again appears to be impossible. It has been over a decade since the mortgage crisis and the Federal Reserve is still trying to unwind its position and bring rates back up to historic norms. This news suggests they will never pull it off.

One reason the Federal Reserve is trapped in a world of ultra-low interest rates is the world economy is based on credit. The foundation of the credit system is U.S. treasuries. When the government borrows money, it is also creating an asset to be used in the financial system. Stable and predictable interest rates make treasuries valuable collateral, as their value will never decline. In fact, the market has an insatiable appetite for American sovereign debt. Those super-low rates are a big part of it.

Of course, the flip side of this is the U.S. government can only exists as it does with super-low borrowing rates. Current debt stands at $22 trillion and goes up by a trillion per year, give or take. Even if the so-called fiscal conservatives got all the items on their wish list, the cost of the great Baby Boomer retirement guarantees massive borrowing for the next several decades. That is only possible in a world of cheap credit, so both sides of the debt transaction need super-low interest rates.

Then there is the retail side. Whole industries have become hooked on super-low borrowing rates. Imagine what happens to housing if mortgage rates return to historic norms, in terms of interest rates and terms. Imagine what happens to the car business when car makers cannot offer 84-month terms and low interest rates. The answer is these industries shrink considerably and take the economy into a depression from which it would unlikely recover. These industries need low rates to survive now.

Now, there is an argument that borrowing rates are normal for a highly efficient modern economy. Historic averages are not useful, as the world where men paid debts with gold coin, or mortgages were processed by hand, is nothing like today’s world of automation and complex financial instruments. There is a lot of truth to this. Automation has not just made transaction processing faster, it has made it more reliable, thus reducing systemic risk and friction. Cheap rates are a reflection of cheaper costs in the system.

There’s also the fact that central banks have greater control of the global economy than at any time in human history. The microprocessor has had no greater impact on the world than in the financial system. Not only do central banks have more information about the state of the economy, they have tools that allow them to see trends before they get going, thus allowing them to anticipate problems before they reach crisis level. It’s not perfect, but managed capitalism is more efficient and predictable.

That said, the main tool central banks have in fighting a financial crisis is lowering borrowing rates. The reason they could soften the blow of the mortgage crisis is they could spread the cost of remedying it across the following decades. In the simplest terms, the Federal Reserve used a payment plan to cover the cost of fixing the mortgage crisis in 2008. That was only possible with the room to lower rates and borrow heavily from the private economy to soak up bad debt and warehouse it at the Fed.

Inevitably, this topic leads to questions about whether the current credit based economy is sustainable in the long run. The old joke about “in the long run, we’re all dead” is true here as well. The current monetary system has been in place since the Louvre Accords in the 1980’s. While there have been recessions, there have been no depressions that threaten the political order. The ability to borrow has never been stronger, which means the West should be able to manage the great demographic change over.

Still, there is that haunting sense that this credit regime is a slow-motion bust-out where social capital is turned into cash and used to perpetuate the current order. At some point, when the West is nothing but a shopping mall full of strangers, with no connection to one another, what happens then? The West is haunted by the sense that the true cost of cheap credit makes the credit based economy unsustainable. In the end, the cultural capital will have been exhausted and there will be nothing left to borrow.

To contribute to my Escape From Lagos Fund

Or, You can send money to me at:

P.O. Box 432
Cockeysville, MD 21030-0432

The Bandit Economy

There is an old parable about business ethics, where a young ambitious man is hired to run a pickle factory. Being ambitious, he comes up with a brilliant idea to increase productivity. He reduces the number of pickles in each jar by one. The result is the cost per jar falls and the number of jars produced goes up. His bosses are suitably impressed and he is quickly promoted. The firm hires another young hotshot to take his place, he quickly figures out the scheme and repeats the process.

The lesson of the story is that such an approach is not really about increasing efficiency or cutting costs. It is about fraud and the limits of fraud. If this process is carried out a few more times, customers will notice that the jars have a lot less product. Taken to its logic end, the company will eventually be sending empty jars to the market. Of course, once the public catches onto the fraud, the good name of the company is ruined and all of those savings they gained on the front end are lost on the back end, plus interest.

It is a useful parable when trying to understand what has happened to America over the last three decades. Free of the threat of nuclear annihilation, the ruling class has abandoned ethics and morality. One result is we live in a bandit economy, where things like shrinkflation are features rather than exceptions. This post over at Zero Hedge details how the gas you put in your car has been systematically watered down over the last quarter century, coincidentally starting at the end of the Cold War.

Of course, a trip through the supermarket will find plenty of examples of this phenomenon, some of which border on the absurd. The classic pint of ice cream is now fourteen ounces and shrinking. It won’t be long before they will quietly change the definition of quarter to be 2.5 pints. Only conspiracy theorists will notice the change. It used to be that a pint was a pound the world around, but you can’t even buy a pint of beer without a heroic capitalist pulling shenanigans on you. It’s becoming a game with them.

The libertarian line about the market simply being a place where buyers meets sellers sounds good in the hothouse, but in the real world, left unattended, it becomes a grifters alley, where the honest are preyed upon by the unscrupulous. Just as there is never a cop around when you need one, there is no longer anyone policing the practices of our capitalist overlords. If you want to know why people at the end of the Industrial Revolution were open to the call of communism, stand in the chip aisle of your market.

If you are the sort who likes a sandwich and some chips for his lunch, the one thing you can’t help but notice is the bags of chips have grown larger and more expensive. What used to be fifty cents is now a buck-fifty. The bag is also twice the old size, but inside are fewer chips than in the past. It’s already reached the point where the bag is 80% air and 20% product. If this continues on much longer, the lunch time snack will be a dirigible sent to your office containing one chip. That will be your drone delivery.

What the West is experiencing is something people figured out at the end of the industrial revolution. That is, market capitalism is great, except for the market capitalists. Left unsupervised, they quickly turn into bandits in business attire, coming up with clever ways to rob the public. Another feature of this age is the declining number of independent suppliers. It turns out that a feature of unrestrained market capitalism is the strangling of the market by a handful of powerful suppliers, who exercise hegemonic power.

Of course, what is happening here, in a million little daily transactions, is the monetization of public trust. The office workers grabbing lunch trusted that the participants at their local deli were playing fair. Meanwhile, those clever MBA-toting business men and their brilliant ideas about removing just one more pickle from the jar, are exploiting this trust and skimming a few more pennies from the unwitting customer. This sort of practice is modern coin-clipping, which used to be a capital offense.

At some point, when the rubes notice their sandwich can fit in the palm of their hand and the bag of chips is the size of a hot-air balloon, they lose their naiveté and privately realize they are being scammed. We live in a cynical age, because privately, people are coming to believe nothing is on the level and no grift is too small. That has the effect of codifying deceit as a feature of the market and of society. We are rapidly reaching a point where only a sucker trusts anyone other than his friends and family.

This is why unfettered market capitalism is a cancer on society. It turns morality on its head, justifying the unwillingness of the elite to enforce public morality. It’s why your kid’s phone is full of hardcore pornography. The market has spoken and you’re not against the market, are you? Eventually, there is the “A-HA!” moment, when people discover that their private loathing of the daily grift is shared by a large portion of the population. The preference cascade sets the world on fire and morality returns with a vengeance.

To support my work, subscribe here.

The Black Poodle

There have always been certain issues that function as litmus tests, in that there is a factually correct position and many factually incorrect positions. Those wrong position, however, tell us things about the person holding them. Gun control is the best example. The right position is based on a mountain of data collected over generations. The wrong positions range from uninformed to the mendacious. As a result, the gun issues is a good litmus test. A person wrong on guns is telling us things about themselves.

The universal basic income is shaping up to be another one of those litmus test issues, where the self-righteous and fashionable use it to advertise their virtue and edginess, but also tell us about their ignorance. The other day, the leader of America’s hipster intellectuals, Claire Lehmann dramatically announced she is now on board with the universal basic income. In fact, Andrew Yang’s goofy Asian hipster populism platform is starting to become the cool thing among our edgy trend setters.

The giveaway at this point, with this issue, is in that linked Quillette post. “There are reasonable arguments to be leveled in good faith against the UBI platform, which Yang has dubbed “The Freedom Dividend,” but what was once considered a utopian pipe-dream is beginning to sound more plausible in light of the unfolding tectonic economic and technological shifts.” Are there reasonable arguments made in bad faith? That line makes clear that one side is virtue signaling, hoping the other side plays the role of skeptic.

What’s shaping up is the UBI is going to be the hipster beard for the politically active millennials, who dream of living as the Eloi. As was brilliantly explained before, it can’t possibly work as expected, but that is part of the attraction. That’s always part of the appeal to utopianism. The believers are emotionally wedded to the idea because the Promised Land always feels just out of reach. The world without work, where everyone is free to self-actualize and get a gold star from teacher is the millennial dream.

The math of UBI is really not worth discussing, however, as the people excited by it are incapable of grasping it anyway. They are simply using the issue to stake out what they think is the moral high ground. Yang is a very smart guy, who grew up studying the people now flocking to these sorts of ideas. The alt-right thinks they meme’d him into existence, but Yang looks a lot like an East Asian Obama. That is, he is the sort of minority who flatters upper-middle class white Progressives just be existing.

The real problem with the UBI is it is part of the larger trend of infantilizing people, turning them into wards of the custodial state. A society where everyone is watched, where everyone has their speech monitored, where everyone is on an allowance, is called a prison. That’s how prisons work. Given the tender sensibilities of the next generation, this world is evolving into a daycare center. Ideas like UBI are not about economics. They are about normalizing the custodial state. UBI is Faust’s poodle.

The problems that UBI are supposed to address are real and concerning. Automation is replacing labor at an alarming rate. Sure, the robot future is wildly exaggerated, mostly by people who have no experience in the real world. Most people reading this, for example, will not live to see robot trucks roaming the highways. Still automation is a serious issue facing the West. The consequences are frightening, not for material reasons, but because they will force the West to face up to the reality of culture and social organization.

You’ll note that in the linked Quillette article, there is no mention of immigration. The latest data show that Trump’s alleged jobs boom is mostly just a boom in migrants finding work in America. End immigration and automation suddenly is a different issue. In fact, it becomes a tolerable issue, because a society willing and able to put its own interest ahead of strangers is able to rationally address the sorts of welfare schemes required to support friends and neighbors. That’s the fear that truly haunts our ruling class.

In fact, the fear of facing up to the basic questions every society must address is what is behind the fear of automation and technology. When Tucker Carlson told Ben Shapiro that he would happily ban certain forms of automation, Shapiro nearly burst into tears because he lives in fear of ever having to face the questions Carlson raised. When you face the questions “Who are we and what sort of society do we want?”, things like automation and social welfare become less frightening. UBI is a way to avoid facing those questions.

Litmus tests like gun control or now UBI offer an opportunity to introduce the subjects that our betters would prefer not to discuss. UBI is a door that opens to a debate about who we are and what kind of society we want. That inevitably leads to the question of who gets to decide and why. That debate is always a part of what defines a society. For the modern West, it is a part that has no conscious place in our political life. Talking about the details may not be a lot of fun, but even a deal with the devil has opportunities.

Zero Marginal Culture

A long running gag in popular culture is one where the adults complain about the fads popular with the younger generation. Adults supposedly have been complaining about the kid’s music since the birth of pop culture in the 20th century. The same is true of clothing styles and haircuts. Of course, part of that is the marketing of popular culture. The people peddling this stuff try to feed on the normal youthful rebellion, so an ideal result, if you’re in the business, is for the adults to really hate it. Then the kids will love it.

The assumption underlying this gag is that there is no objective difference in quality between pop culture trends. The perceived quality is relative. From the perspective of a teenager, the new thing is useful because it translates to status within their peer group or allows them access to a desirable youth subculture. For adults, these new trends have no social value. There may be some small value in hating it, but since all adults are tuned to not like teenage fads, the value in not liking it is minimal.

The makers of pop culture made up for this lack of qualitative difference in fads by maintaining a monopoly on the supply. Hollywood was controlled by a small clique from the start and remained a family business of sorts until recent. Music was similarly controlled by a relatively small number of record companies. Read the book The Wrecking Crew and you see how this used to work. This bottleneck on the supply side allowed the makers to keep down costs and therefore maintain a profit margin.

Technology has made it much more difficult for the people controlling the supply side to maintain this bottleneck. That’s mostly because technology has lowered the barrier to entry into pop culture. A great example of this happening in front of our eyes. Talk radio became a thing in the 1980’s. Conservative Inc. controlled middlebrow conservative opinion by controlling the radio networks. If you wanted to talk politics on the Right, you had to play ball with the people controlling the talk radio industry.

Today, some of the most influential voices on the Right are podcasters and live streamers. If you’re under the age of fifty, you’re probably close to abandoning the old radio model entirely, maybe listening to some of the old guys on-line. The audience for Rush Limbaugh is half of its peak now. Most talkers have seen their audience shrink and they are now seeing competition from below. People like Stephan Molyneux can produce high quality, professional content, from their home and reach a broad audience on-line.

The thing is though, supply does not create demand. Just because you can now produce your own music from a home studio, it does not follow that you become a pop star. That old assumption about there being no qualitative difference in trends works in the macro sense, but talent still counts. The fact that young people may prefer pop music from their grandparent’s generation suggests there is a qualitative difference in this area. To these young ears, that music is better, so they prefer it over what the style makers produce.

Alternatively, another way of looking at this phenomenon is that like the consumer electronics business, pop music is now fully commoditized. There’s little or no value added to the music from the producers and creators, so the only thing that matters in the music market is price. Since streaming is the platform of the future, producing new music makes less sense, when there is this vast library of existing music. The kids have not heard these old songs, so selling them the old stuff is possible.

Another aspect to this is the cultural one. Pop music had a peak in the 1970’s and has been in decline ever since. This tracks with the overall decline in the culture. This turns up in per capita music consumption. The aberration was the introduction of the CD, which had everyone re-buying their catalog of music. Otherwise, Americans have listening to less music than fifty years ago. Young people may simply prefer that which was created in peak America over that which is produced in post-America.

Putting aside the cultural angle, which is not unimportant, the economic issue raised by trends in popular culture is how does a market economy work when everything is a commodity? If technology makes it impossible to create bottlenecks and control artificial monopolies on supply, how can concepts like entrepreneurship and market competition still exist? After all, business is about creating scarcity and exploiting it. What happens when the Peter Theil model is no longer possible?

It sounds fanciful, and maybe it is, but it is worth thinking about, as the people who rule over us are thinking about it. The author of this book on the subject is an adviser to the European Union and is read by the western political elite. They are not worried about a world of zero marginal cost. They want to create it. The world of zero marginal cost is also a world of zero marginal culture. More precisely, it is post-culture world, in which things like pop music are simply things supplied by the system on-demand.

Jelly Bean Economics

Imagine you find yourself in one of those underground malls, where they design it such that you never have to go above ground. Now, instead of just the mall, your living and working space is also underground. It is an underground community that is like a small town, except everyone is stuck there, unable to leave the mole utopia. You know, however, that there is a world outside and that people live above ground. It’s a not prison, just a system that is complete, so you have no reason to leave the mole utopia.

In your world, everything works like it does in the world of today. People have jobs, socialize, conduct commerce, and have families, all the stuff we associate with normal human society. The one difference between the mole utopia and this world is their economy is based on jelly beans, the little candies given to kids at Easter. Each color has a different value and people treat them in the same way you would treat coins or bills. When you get paid, it is in jelly beans. When you buy stuff, it is in jelly beans.

No one knows where the beans come from or who is responsible for making sure the supply of beans is correct. There’s some vague notion of a jelly bean consortium and people who spend their days keeping track of all beans in circulation. There are people, who police the bakers to make sure they are not making fake jelly beans. Otherwise, the beans are just the thing that is there, taken for granted by everyone. The jelly beans used in commerce are as much a part of reality as the air people breathe.

Now, there are people in charge and they do control the supply of beans. At first, when they set the system up, they figured the goal was to keep the supply of beans constant, as beans are fragile and people will tend to eat them. The best bean counters in mole utopia were recruited to keep track of the flow of beans in order to determine the overall supply and rate of bean decay. They would order up new beans to be introduced into the supply to keep the supply of beans steady, so there could never be a shortage.

At first they would just have people hand out beans under the guise of charity, but before long the people doing that started cheating. They would keep the beans or only give them to friends and family. The next scheme was to have the government of mole utopia disperse the new beans, by hiring people and buying stuff. This worked pretty well until government started cheating and ordered up beans whenever it needed to buy votes or reward friends of the government. This caused people to lose faith in the jelly beans.

Finally, the bean counters landed on a scheme where they would lend the new beans to banks at extremely low interest. The bean banks, flush with new beans, would then lend beans to people at very low rates. This got the beans into the economy, without anyone stealing them or using the supply to corrupt the system. The one flaw is the bankers got rich from the scheme, but bankers are always rich, so no one really noticed much of a change. It also made the bankers dependent on the bean counters.

The bankers could lend to anyone, including the government. Since rates were so low, the government could borrow vastly more than under the prior arrangements. That meant they could spend vastly more than in the past. The bankers were never worried about the government repaying, because ultimately they controlled the supply of beans, so they could always order more beans. That meant it was the safest type of loan, because the government would always make its payments and make them in full.

The only constraint on the government spending was how fast they could increase spending. Too fast an increase and too many beans would enter the economy of mole utopia, lowering the value of each bean. This could distort markets in unpredictable ways, by increasing demand unexpectedly in some areas, but not in others. This would also raise prices and force lending rates to increase. Therefore, inflation became the only check on spending. As long as inflation remained low, spending was unlimited.

This description of mole utopia may sound simple and ridiculous, but it is how the modern American economy is run by the Federal Reserve. Modern Monetary Theory is the economic argument that government spending is only constrained by inflation, as long as the government has control of the money supply. Here is a short video lecture on the topic from Professor Stephanie Kelton of Stony Brook University. Here is a much shorter version in the form of a post that appeared on Zero Hedge last week.

The basic argument of the MMT people is that as long as there are resources not being utilized by the private sector, the state has a duty to step in and put those resources to use through government spending. That’s a moral argument, not an economic argument or a factual observation. The economic argument is that spending and debt is meaningless, as long as the state is not crowding out the private sector and the spending is not driving up retail inflation. Otherwise, the government can spend as much as necessary.

To many people, this sounds like a version of the old joke about the stranger who comes to a small town looking for a room. He plops down a few hundred dollars and the inn keeper tells him to wait while his room is prepared. In the meantime, the innkeeper rushes out to pay his vendors, who then rush out to pay their vendors. Eventually, that new money reaches the town’s prostitutes, who use the inn for their clients, renting rooms on credit. They rush in with the new money and pay the innkeeper what they owe.

In that old gag, the stranger changes his mind about a room, takes his money back and leaves town, but everyone that was owed money is now paid. That’s the joke. The lesson, of course, is that as long as everyone is getting paid, especially the prostitutes, the system keeps spinning and everyone is happy. That’s the moral theory of MMT in a nutshell. As long as productive resources are being utilized and everyone is getting paid, the system keeps spinning. Just as important, the society remains stable.

The critics will instinctively shoot back that this sort of economics is inherently unstable and the apparent stability is short lived. In the long run, the accumulation of debt becomes untenable and the system collapses. The response to that is no one, especially government, lives in the long run. More important, MMT answers the question as to how government should respond to automation. As robots eliminate jobs, more people become idle. How does the state address the problem of fewer jobs for a growing population?

There’s another way to look at this. The custodial state runs on the same premise as a prison. The first job of the warden is to maintain control of the prison. He does that by making sure the prisoners are always kept busy in ways that work toward his goal of maintaining control of the prison. One mechanism for doing that is controlling the supply of goods and services in circulation in the prison. Prisons have an economy based on items from the commissary and that commissary is controlled by the warden.

What MMT seeks to do is make the sovereign state, by which is meant the issuer of currency, the commissary of the American economy. By controlling the supply of goods and services, via currency manipulation, spending and debt, the state can keep an increasingly useless population busy. It can always reward activities that enhance control of the system and punish activity that creates disorder. Inevitably, the communications companies, banks and technology firms become the prison guards of the system.

Old And Busted

Way back in the before times, at the dawn of the interwebs, I had some dealings with a small niche publisher. He had a few small newspapers he sold that focused on narrow subjects. Before the internet, there were a lot of these publications. Some were in the magazine format, while others were like a small newspaper. The model was to charge a relatively high subscription fee to a small audience. They could not sell ads, so the only way they could survive was on high subscription rates to loyal fans.

One day, this publisher starts telling me about his plans to abandon the old model and move to the internet. That way he could cut his production and postage costs, which were the biggest part of his operation. I asked him how he was going to handle the revenue side, as this was before firewalls and on-line payment processing, He said he was going to make up the difference with clicks. After some back and forth, I told him banks don’t take clicks, so he better come up with a way to make money, rather than clicks.

The guy thought I was just ignorant about the way the future would work, so he dismissed my skepticism. He was not alone. In the 1990’s, everyone was given a disk and then a CD that allowed them to get on-line and feel like there were on the cutting edge of technology. They were in the new economy, with clicks and traffic, not the old economy with money and expenses. It was a good lesson in human nature. Take people out of their natural environment and you suddenly see their raw cognitive ability.

That story comes to mind whenever there are layoffs in media and the media people start analyzing what went wrong. This story at Wired is better than most, but the fact that it needs to be written at this late date says a lot about the people in the media. By now, everyone should know that the newspaper model was never about the news. It was about the distribution system. The newspaper brought ads and marketing material to the people at a cost and efficiency no one could match. That was always their business.

The news part was the marketing expense. People would buy the paper because of gossip or the sports pages. The news was only interesting when something interesting was happening. Otherwise, the so-called hard news side was a sinkhole. When the internet robbed these operations of their distribution hegemony, the logic of their business went with it. When the internet robbed them of gossip and sports, they were left with hard news, which has a tiny market, but huge expense.

This was obvious by the middle of the Bush years. Yet people in the news business have never noticed. Today, in a world where most everyone knows most news is fake, just made up by desperate losers looking for attention, the point should be impossible to ignore, but here we are anyway. After Vice, Huffington Post and Buzzfeed cut staff in what will be a long journey into insolvency, the media was full of hand wringing about the state of journalism. It suggests the people in the media are not terribly bright.

That still leaves open the question as to why no one can find a model for news that is sustainable, without rigging the market or relying on the charity of billionaires. The on-line advertising model was always a bit of sham and that is becoming increasingly clear as Google and Facebook monopolize the space. Even there, the viewership of the ads is declining, as people employ counter measures. The result is more people are exposed to ads, but fewer people are watching them. At some point, that becomes a problem.

What may be true of the news business is that without monopoly or oligopoly power, it cannot exist beyond some scale. That is, a form of Brook’s Law comes into play. The more journalists that are added to a news enterprise, beyond some optimal number, the faster the enterprise descends into insolvency. A single journalist can create enough content for a theoretical maximum of consumers. Two journalists, however, can produce something less than the sum of those theoretical maximums.

This would explain why local papers somehow manage to bugger on, despite what is happening to city broadsheets and even tabloids. It’s not that the local paper fills a niche, which is certainly true. It’s that it never grows beyond a certain size and that size is well below the failure point. The people working in it don’t see themselves as a secular clerisy and instead take a practical view of their job. As a result, the cultural dynamic inside the organization is like you see inside any small local business.

Another point worth mentioning is that it has always been assumed a new economy would evolve to take advantage of the new efficiency brought on by technology, particularly the free flow of information on-line. What’s going on with mass media suggests maybe there is another option. Technology eliminates large chunks of economic activity, not through automation, but by making it impossible maintain barriers to entry. That is, when the price of something fully reflects all available information, the price drops to zero.

The Economics Of Democratic Empire

The economics of empire are fairly well understood. Persia for example, conquered the surrounding people, because it meant those people paid tribute to Persia. The cost of conquest was covered by the initial booty, at least in theory. Tribute was calculated on the ability to pay and the cost of defending the new land. While ego certainly played a major role in empire building, the economics were also a factor. In agrarian society, land was the store of wealth, so acquiring new lands was how a people got rich.

This is the reason empires preferred to negotiate with potential new vassals, rather than just invade. It made the math predictable. The initial conquests were all about the warrior spirit or maybe old grudges, but as an empire matured, it was about economics. If a city-state on the Aegean, for example, was willing to submit to Persia without a fight, the cost of conquest was easy to calculate. Not only that, it lowered the cost of maintaining the relationship, as the new vassal would be cooperative.

This has been the rule of empire since the first empire. The Romans conquered the Italian peninsula because of age old conflicts with the neighboring people. They conquered the Mediterranean because it made them rich. The British Empire was a purely financial empire, as were all of the colonial empires. There were rivalries between the European powers, for sure, but their main motivation was economic. Conquering the New World and Africa was all about enriching the conquerors.

There has always been another element to the economics of empire and that is the nature of rule. Empires have always been defined by personal rule. A ruling family or maybe a ruling tribe, sat atop the system. They owned lands themselves and treated their conquests as personal property, even if they were not defined so legally. When new lands were acquired, the emperor or king got his cut first. Then the rest was distributed to his lieutenants and supporters down to the soldiers themselves.

Personal rule means personal responsibility. Darius, the Persian emperor, had a personal stake in the welfare of his vassals. To simply loot them would be like a shepherd skinning his flock, rather than shearing them. The economics of empire have always been the same as the economics of monarchy. The people at the top must treat their vassal states as they would treat their own property, which means they have a stake in their prosperity and therefore a motivation to preserve the value of the conquest.

America is the first democratic empire. The British Empire had democratic elements, like a parliament and limited suffrage, but it was a long way from liberal democracy, as we currently define it. By the time liberal democracy swept the West in the first half of the last century, the British Empire was in steep decline. That process was the result of America rising to dominate the West and eventually become the global hegemon. America elected to conquer the world in order to spread democracy.

Democracy, of course, turns the ruling class of a country into renters. Unlike an owner, a monarch for example, the office holders in a democracy are in it for short term profit. The next election could find them back in the dreaded private sector. In order to hedge against that eventuality, they must convert as much private property into public property, in order to distribute it to friends of government. Democracy is just a formalized version of tragedy of the commons, that always ends in it murdering itself.

The question then is how a democratic empire can survive, when the ruling elite of that empire are motivated to loot the empire. In the Cold War, this was not a consideration, because the other side was a similar empire build around communism, which is just the material implementation of democracy. The natural inclination of both systems to loot themselves was checked by the very real threat of nuclear annihilation. The commies invested in territorial integrity, while the West invested in their economies.

The collapse of the Soviet Empire is something that gets little attention, as it is just assume to have been inevitable. Communism, however, shares something with liberal democracy. The people at the top have no incentive to invest in society. The Soviets did not develop their social and human capital. Instead, it ruthlessly exploited it, along with the natural resources of the territory. The Soviet system was like a renter using the furniture for firewood. When the energy markets collapsed, the Soviets collapsed.

Liberal democratic empire, rather than strip mine natural resources from the land, monetizes social capital through cost shifting. For example, business brings in foreign workers to suppress wages, but then dumps those workers into the surrounding community. Their cost of support consumes the social capital of that community through corruption of local institutions, increases in crime and social alienation. In other words, the cost of cheap goods is the loss of community and local control.

Another aspect of the exploitative economics of liberal democratic empire is how America strip mines foreign lands of their human capital. Silicon Valley, for example, is majority non-white. The best minds from around the world are recruited to the economic centers of the empire. Spend time around the Imperial Capital and it is not only a foreign country, it is an alien country. It is nothing like the rest of the empire. That’s because it is a collection point for foreign elites serving the empire.

What collapsed the Soviet system was the same as with any economic enterprise. The cost of maintaining it exceeded the benefits of maintaining it. The Soviets ran out of cash to pay their bills and went bankrupt. The Soviets had to subsidize the vassal states in order for the local elites to remain in power. They also had to spend on security forces to keep those local elites from getting any ideas. The cost of doing those things eventually exceeded the proceeds of natural resource extraction.

In the American empire, a different crisis is brewing. The destruction of social capital has reached a point where the middle class is collapsing. Inequality has never been higher, but it promises to soar as the Baby Boom generation ages off and their assets are consumed by the state. The proliferation of private debt to provide the illusion of prosperity and mask the loss of social capital, has beggared the young. The next generation is guaranteed to have a lower standard of living than their parents.

The collapse of social capital is surely one cause of the decline in entrepreneurship. To start a business is to take a risk. Having social support not only mitigates the cost of failure, it encourages risk taking. As capital, social and human, has been collected into the control of an increasingly narrow elite, entrepreneurship has declined while overall leverage has grown. The rentier system of liberal democracy, has turned the ruling elites into renters, using up resources without replacing them.

The Russian implementation of democratic communism in an empire became unstable when the proceeds from energy sales could not cover the cost of empire. Like a business with a negative cash flow, it simply ran out of money and collapsed. It’s tempting to think something similar happens in America. After all, government debt at all levels is staggering and is accelerating. That’s a mistake, however, as the state is no longer in control of the empire. Control now rests in private hands.

Proof of that is the inability of the empire to control the borders. Across the West, the voters want to sharply reduce legal immigration and end all illegal migration. Yet, supposedly sovereign governments are unable to do it. In America, the President is stymied at every turn by a system largely controlled by forces that exist outside the government. The reason there can be no border wall is the managerial elite that benefits from and is in charge of the empire, will never permit it.

The more likely source of instability will come from the cannibalization of social capital that has been the fuel of the “new economy” for decades. The loss of social capital has reduced social trust, which in turn has resulted in a decline in trust of national civic institutions. Why would people put faith in their institutions when it is clear that their office holders are powerless? That is a lesson rocketing around Europe. It explains the “yellow vest” protests and the rise of right-wing populism.

In America, only a fool believes the ruling class. People are becoming increasingly alarmed by what’s happening in the administrative state and its private partners in the technology and financial class. This loss in trust will inevitably lead people to look for alternative sources of legitimacy, authority and collective security. Identity politics is just a preview. As America becomes majority-minority, politics becomes a winner take all proposition, which will foster a rise of tribal politics.

The traditional empire always stagnated when it stopped expanding. What followed was a long period of decline. In a democratic empire, the economics that naturally flow from democracy hollow out the empire, by converting its social capital into power and status of a detached ruling elite. The global rulers of today see themselves as detached from those over whom they rule. Their subjects are just resources to be utilized and discarded.

The question to be answered is what happens to the American empire when the social capital is gone? Is it possible for a tiny alien elite to maintain control of a continent-wide population entirely dependent on the system for order and stability? Can the culture of the penitentiary scale up in such a way that the inmates still believe they are in charge of the institution? No one knows, because there has never been a democratic empire, but that is the task facing the ruling class of the American empire.

The Coming Crisis

In a crisis, people either turn to their institutions or they turn to their leaders to provide a path forward through the emergency. This is especially true when the path forward is waiting out the emergency. People respect action, so they have to have faith in their leaders if the right course is patience. Alternatively, if the leaders and institutions are not up to the task, then the people turn on each other.The French Revolution is the perfect example of what happens when leaders and institutions fail in a crisis.

It has been a long time since American faced a real crisis. The closest we came to anything major was the financial crisis a decade ago. For people foolish enough to take on the crazy mortgages, it was a very real emergency, but for most people it was more of an abstraction than a real crisis. Unemployment ticked up and the stock market took a header, but it was not the Great Depression. There was a concern, for sure, that the wheels were about to come off the cart, but it never materialized.

Of course, one could say that the leaders and institutions stepped in and guided the country through the crisis. People tend not to think of the Federal Reserve as an essential institution, but it is probably the most important part of government now. The head of the central bank is every bit as important as the President. In fact, he may be more important, as we saw with Greenspan and George Bush. An overly tight monetary policy led to a slight downturn in the economy at just the right time to sink the Bush election bid.

In 2008, the world was lucky to have a Fed chairman, who had prepared his whole life for such an event, and a very weak political class. Bush was near the end of his reign and no one thought much of him anyway. Congress has not had much credibility in decades, so they could not cause too much trouble. Bernake was given the room to do what had to be done to stabilize the financial system. People can argue about the solution and various alternatives, but the Fed did provide a peaceful path forward.

The world was lucky in another way. The public was still confident in the system, even though they may not have liked many of the people in it. George Bush was down in the polls, because of the Iraq war, but people still trusted he was a good guy. The restoration of public trust during the Reagan years still cast a shadow over the Bush years. Even though Clinton had been a degenerate and Bush was an incompetent, people still thought the system was fine. They could trust the system.

That brings us to the present. Half the country voted for Trump and increasingly blames the system for blocking his efforts. The other half voted against him and increasingly suspects he is punishment for a broken system. The political class is at war with itself, as it grapples with the fact it no longer commands respect. Then there is the hidden war between the semi-permanent administrative state and the reformers in the White House and Congress. Right now, the people and institutions are not very stable.

That’s what makes the rumblings from the financial system ominous. Wall Street is not Main Street, so a year long bear market should not be overstated. The old line about the markets being predictive is nonsense. If people could see the future, there would be no stock market. The US markets went on a crazy upward run and may simply be going through a correction. Still, the housing market is heading into a recession and the economy is showing signs of a slow down, if not a recession.

None of this is cause for alarm, but what if the long prophesied collapse of the credit system is a lot closer than we know? A lot of smart people said that 2008 was one of those tremors that precedes a major earthquake. Maybe what we have been experiencing is something like the Long Depression, which ran in fits and starts for two decades. The last few years have simply been a respite and we’re about to have another serious downturn or even a panic. Will the leaders and institutions hold up?

In other words, the economic pendulum swings back and forth. That is the lesson of economic history. The salient question is whether or not the political institutions and the leaders are able to hold up as the pendulum swings. In the 19th century, Europe was convulsed with civil unrest and war as the Industrial revolution blasted through traditional institutions. In the US, the post Civil War period was relatively calm, even though the same forces were at work. The institutions and leaders held up.

Again, we really don’t know if the current system and the people in it could hold up under a real crisis. Maybe the 2008 crisis can be read as proof that the system is better than the people in it. Maybe the lessons learned from it have made the system even stronger. On the other hand, maybe the system held up up because of residual stability that has now dissipated. That’s increasingly obvious with regards to public trust. It is much lower today than it was a decade ago. Maybe the same is true of the internal stability.

The thing is though, there are a lot of signs that the people at the very top of the global system are slowly rearranging the board. For a long time, America could count on the dollar as the world reserve currency and, more important, a hungry market for US Treasuries. The system built by the American empire relies on credit to operate and the reserve credit of the world is US debt. If there is even a hint of that changing, the great crisis will be upon us. Will those institutions and people hold up?

The Wizards

In the 1980’s, one of the great puzzles for conservatives was how left-wing economists could not bring themselves to acknowledge the obvious. The Soviet economic model was a failure in absolute terms, as well as relative terms. Even long after the Soviets collapsed, guys like Paul Krugman remained puzzled by the inability of the communist system to keep pace with the West. His answer was that the Soviets either lost their will or lacked the moral fiber to make revolutionary socialism work in the face of capitalist cynicism.

As Greg Cochran has pointed out, the failings of socialism were obvious to anyone willing to look at what was happening behind the Iron Curtain. Once the Soviet Empire fell, it was undeniable, but economics never paid a price for being so wrong. In fact, the status of the field went up in the years following the Cold War. Nobel Prize–winning economist Joseph Stiglitz become something of a shaman to the ruling class, despite a miserable track record. He’s another guy who thinks the morality of socialism should make it work.

Now, part of this is something that John Derbyshire pointed out in his infamous review of Kevin McDonald’s book, The Culture of Critique. “Jews are awfully good at creating pseudosciences—elaborate, plausible, and intellectually very challenging systems that do not, in fact, have any truth content.” In fairness to John, he was summarizing what McDonald had written, but he largely agreed with the assertion. There’s a fair bit of this in economics, where smart Jews often play clever games arguing against observable reality.

That’s a fun point to make, but that’s not the reason for economists to be wildly wrong about so much, yet immune from criticism. By now, someone in the field should have pointed out that Joseph Stiglitz is a crank. Someone like Christine Romer, who was Obama’s top economist, was completely wrong about the effects of his stimulus plan, yet she was rewarded with a plum job in the academy. In most every field, even astrology, being that wrong is disqualifying. In the field of economics, it has no effect whatsoever.

Now, it is fun to mock economics, but it really should be a useful field and play a positive role in public policy debates. There are useful observations that come from the field, with regards to how people respond to various economic policies. In theory, the economics shop should provide objective analysis of government performance, policy proposals and basic data about the state of the economy. Government is about trade-offs and with regards to domestic policy, economics should provide the details of those trade-offs.

Of course, there are reasons for the field being a useless mess. One reason is that economics is not science. It is a basic set of immutable truths swimming in a sea of pointless analysis, clever models that mean nothing and wishful thinking. Then there is the fact that there is money to be made in putting your stamp on the polices of one party or the other. When Christine Romer was selected by Obama, it was the golden ticket to elite of the New Keynesian Economics cult. She and her husband are now senior clerics.

There’s something else that can be teased out of this phenomenon and that is the corrosive effect of democracy on objectivity. Democratic forms of government lack legitimacy, because they start with the assumption that anyone can hold any office within the system. No one is going to respect the office of legislator if the job can be won and held by anyone. Even in a republican form of government where you have to pass through a process to stand for office, the assumption is that anyone can enter the process.

Unlike other forms of government that can rely on the blessing of the religious authority, democracy inevitably obliterates any threat to itself. Christians like to believe that the decline in faith corresponds with the rise in public corruption, but it is the reverse. The spread of democracy is what drives the decline in faith. Everywhere democracy becomes ascendant, religion moves into decline. This is an observation Muslims have made, which is why they oppose democracy, and specifically American liberal democracy.

That need for moral authority is still there, so inevitably democratic system evolve a civic religion and before long a civic clerisy. This intellectual elite, supported by the political elite that control the democratic institutions give their blessing to the whims of the office holders. The role of economist is that of the court astrologer in Persia or Merlin in the court of King Arthur. They appear to be consulting hidden knowledge to find the correct policy answer, but they always end up endorsing whatever their patron desires.

The other side of this coin is there is no reason for the political class to attack their court magicians, even when they are completely wrong, because they will need them to bless the next set of polices. The worst thing that happens is what you see with Romer. Her and her husband have lifetime positions at an elite university. Stiglitz gets treated like the senior shaman by all sides of the political elite, because someone has to fill that role. It’s a lot like how the Catholic Church handles pedophile priests, when you think about it.

The Mysteries Of The Collapse

While I was in Europe, the world celebrated the anniversary of the collapse of Lehman Brothers, the financial house at the center of the mortgage meltdown. Like everyone, the fact that it has been ten years since the world teetered on the edge of the abyss slipped my mind. It is important though, to think back on the last decade, since many economists and analysts still think it was a near-death experience for the world. Danish television was playing the movie The Big Short, which was based on the great Michael Lewis book.

As to the crisis itself, a few things remain remarkably obscure. One is that the best minds on this stuff still cannot bring themselves to notice the biological element. Blacks and Hispanics were wildly over-represented in the default numbers. The only analysts and commentators, outside of those on this side of the divide, to notice this fact, do so in order to “debunk” it. These are the folks who run around making sure everyone in the human sciences says “race is a social construct” five times a day while facing Frankfurt.

The other mystery is that the so-called experts still have not explained how the sub-prime mortgage bubble formed, why it went unnoticed and what happened in the after math. Even a decade on, it is hard to get reliable numbers on the quantity of mortgages that constituted the bad paper. The only thing that the experts agree upon is that the lowering of lending standards created a speculative bubble. The result was a wave of over-lending and over-building, that led to the great mortgage bubble which burst a decade ago.

Currently, the druids from the grand economic council claim that eight million people lost their jobs as a result of the recession that followed the collapse. That seems small, given that the labor force is roughly 160 million. That means unemployment would have gone from about four percent to just under ten percent. That’s the official line from the druids in the academy, but it certainly does not fit with the narrative about this being a near-death experience for the economy. Those numbers suggest a fairly common recession.

Another part of the official narrative is that super-smart druids from the academy rushed in and saved the world from ruin. That’s an interesting aspect of this story. Economists all believe that the Great Depression could have been thwarted, and as a result the events that followed could have been avoided, if central banks had expanded the money supply in response to the crash of ’29. Therefore, the reason this crash did not result in world war and the rise of you-know-who was the central banks expanded the money supply.

Another number that was presented at the end of the film was that the collapse resulted in six million foreclosures. This number is hard to judge, other than the presence of the mystical number six. There’s no question that lots of people lost their homes. It’s also true that lots of connected people cashed in on this by quietly investing in house flipping operations that preyed on the vulnerable. I recall being in Las Vegas sometime after the crash and thinking that the only guy getting rich was the guy selling “For Sale” signs.

Of course, the inability to figure out the details of what was billed as the greatest economic event in world history since the crash of 1929, may have something to do with who was responsible. In a world run by bankers of a certain sort, it is probably a bad idea to point out that the bankers were responsible for destroying the economy. The economists start from the assumption that the failure was not systemic and not deliberate. They seem to view it as a weird accident like leaving the coffee pot on before leaving for work.

It’s like the bias toward normal distributions that Nicholas Taleb discusses in his book, The Black Swan. This blind spot for various aspects of the crash is not the result of some complex conspiracy. Economists are not sitting around plotting to obscure the facts from the public. They simply start from a set of assumptions that rule out things like a cultural bias that manifests as a systemic bias. They can only think systemically within the accepted parameters of the system itself. That means ignoring lots of possible answers.

Like the Great Depression, the mortgage collapse of 2008 has created a specialty of study within the field of economics. PhD’s in economics will be based in this event for generations, assuming the we make it that long. Each book and paper will fill in a bit of the official narrative until the only people questioning it will be cranks and oddballs. This is how religions evolve. As long as the disaster is not repeated again in the near term, the ambitious will be happy to go along with the conventional wisdom.

Another part of the official narrative is what is assiduously excluded from the official narrative. For example, the fact that no one was held accountable for the disaster. Take, for example, Franklin Raines, the head of Fannie Mae. He walked away with millions, never having to answer for his crimes. Angelo Mozilo, the guy in charge of Countrywide Financial, was allowed to avoid acknowledgment of wrongdoing and criminal charges, by paying a relatively small fine to the SEC. He retired a gazillionaire.

Just as important, as Steve Sailer likes to point out, no one even mentions that the Bush Crime Family was largely responsible for the sub-prime loan disaster. It was the Bush administration that pushed banks to drop their lending standards as a part of the “ownership society” campaign and the desire to buy votes from migrants. In fact, the political class emerged unscathed from the disaster. If anything, the catastrophe that was the Bush administration strengthened the managerial state’s stranglehold on society.

Here’s where you see the race obscurantism warp official reality. To focus on the wrongdoings of the Bush people, would require acknowledging some unpleasant realities about diversity. For example, default rates for blacks and Hispanics were three and four times the rate for whites. Similarly, the people targeting these groups with bogus loans were doing so because they knew they were not savvy enough to understand what was happening to them. That opens doors that must remain bolted closed in this age.

My own view on this, to wrap up the post, is that the financial system is built on the biases of the people who control it. A system designed by people who keep a bug-out bag next to their desk, and leave their car running in the parking lot, is never going to incorporate long term risk. Ours is a parasitic system that is designed to drain the blood from the American middle-class. The patches and remedies to keep it going are just that, quick fixes to keep the blood flowing. Eventually, the host will die and the bankers will move on.