A Post About Feudalism

In the Middle Ages, feudalism was not thought of as a political system or even an economic system. The people using the term, and enforcing the rules, simply looked at it as a set of reciprocal legal and military obligations among the nobility. The lord or king, granted property, a fief, to a vassal, who then had military or economic obligations to the lord who granted it to him. The property could be land, titles or a right to collect taxes in a certain area of the realm. You’ll note that the peasants were not part of the discussion.

Just because the people ruling over the feudal system had no regard for the peasants, it did not mean the peasants were unimportant. The peasants worked the land, provided men for military service, operated the system of trade and food rents. Modern historians prefer to describe this period as manorialism. This a system that bound the peasants, the nobility and clergy together economically and politically through a hierarchy of economic obligations. Everyone kicked up to someone, in labor, kind or coin.

It’s easy to dismiss this organizational model, but it lasted for six centuries and provided the foundation for later developments like property rights and the rule of law. One big flaw in this system is it transfers the cost of society, and all the risks inherent in the human condition, to the lowest possible level of society. The peasants have to hand over food rents, even when there is a bad harvest or an invasion by barbarians. That’s because the lord of the manor owes his lord food rents or coin, regardless of the harvest.

Probably the biggest defect is it is a zero sum game at the top of society. The king can only have one heir. Similarly, his vassals can only have one heir. Usually, the goal was to have an heir and a spare. The spare served in the military just in case the first born son died or was an idiot. Extra kids and daughters would be sent off to the church. This is good for the church and military as they get high quality people, but the rest of society is locked into a swelling peasant population until nature culls the herd.

In his book A Farewell to Alms, Gregory Clark argues that Britain experienced an extended period where the peasants died off due to disease and violence. At the same time, members of the ruling class precipitated down to take up the positions in the lower classes. Downward mobility raised the mean IQ of British society until it reached an inflection point where it escaped feudalism and developed a market economy, and eventually the industrial revolution. Downward mobility birthed upward mobility.

Historians have argued that the black plague ended feudalism on the Continent because it knocked the foundation out from under the economic pyramid. When a third of the peasant population was killed by disease, the system ceased to be economically viable. Of course, the disease killed a lot of nobles too. Once the peasants were free to move about, they could go work for the highest bidder. The labor shortage caused by the plague gave the peasantry new economic power and that translated to political power.

The mobility of human capital, vertically as well as horizontally, coincides with the collapse of the feudal system. Whether it was the collapse of the system that unleashed this mobility or it was the mobility that undermined the system is debatable. Perhaps some combination of both. As the system became more fragile, mobility increased, which in turn made the system more fragile. The waves of plague that decimated the population finished off the process that started much earlier.

something similar happened in America in the 17th and 18th century. The second and third sons of land owners headed west looking for land. Of course, ambitious and talented men like Ben Franklin could literally go from rags to riches. Similarly, the post WW2 period was a time of high social mobility in America. Ambitious men could move up into the middle class or move west looking for a shot to make their fortune. It’s not an accident that the U-Haul Company started after the war. Americans are not moving much anymore.

Another interesting reality of the feudal system is that it was a rentier system. The people at the top did not make anything or improve anything. They were not particularly inventive or creative. The slow progress in agricultural technology is a good example of the technological stagnation. The nobles and the church lived off the rake. They skimmed from every layer of society. Feudalism was  a pyramid scheme, where each layer paid the layer above a portion of their take. It operated a lot like the modern financial system.

The real key to the system, the point of system, was the protection of asset values, which mostly meant land, but also mines, ports and fisheries. The chief concern of the nobles was the preservation of the asset base. Owning land meant owning rents, which meant a permanent place in the ruling class. Feudalism was, at its heart, a way to protect land from external threats, as well as internal ones. In the modern age, the monetary system works the same way. It’s primary purpose is to protect and promote asset values.

The challenge of the feudal system was not a lot different from the challenges of the current age, at least for those who sit atop the social system The key was maintaining the balance between the social layers of the pyramid. Too many people in the managerial class means too many idle hands doing the devil’s work. They could also start complaining about their economic status. Maybe they would try to rally the lower classes to support their demands for a bigger share of the skim.

No Footprints

In the 1980’s, companies like Lotus Development Corp were “growth” companies, which meant they could not sell their products fast enough. The PC revolution was in full swing and Lotus 1-2-3 was the killer, must have, application. If you walked into their Cambridge headquarters, it looked like a bomb went off because no one had time to be tidy. It was all hands on deck to get product out the door. There were not a lot of rules either. The game was to grow and that’s what mattered. All the other corporate stuff was secondary.

That did not last. By the mid-90’s, the desktop computer market was established and the default platform was Microsoft Windows, which meant Microsoft Office. It was around this time that IBM was making a hostile takeover bid, not because they wanted a growth company, but because Lotus was becoming an asset company. That is, its value was no longer in sales of its products, but in the value of its patents and technology. IBM bought Lotus in order to squeeze every drop of juice from it and then, eventually, toss it away.

That’s the modern economy in a nutshell.

The Technological Revolution is often compared to the Industrial Revolution, because of the cultural impact. After the steam engine, people did not just have better stuff. People were different. They lived different and had different relationships to one another and their rulers. A similar process is underway in the Technological Revolution. Mass migration, the elimination of the middle-class and the end of popular government are three obvious examples of changes wrought by the technological age.

One difference between the Industrial Revolution and the Technological Revolution is the trail of breadcrumbs each left behind, as it worked its way through society. Today, Americans still drive over roads and bridges built during the peak of the industrial age. Even though our consumer goods are made by foreigners, they still use the same practices the West developed for industry. Even in blighted cities, you can still find old factory buildings that remind us of the past.

The technological age is a different animal. It tends to erase its own footsteps. Lotus Development Corp is a good example. It was not just that it lost the competition for desktop productivity software. Everything about it was consumed and recycled. Walk around Cambridge today and you cannot tell that Lotus even existed. The tech economy is a soylent green economy. Once the utility of its creations are exhausted, everything about it is consumed, erased from existence, as if people are ashamed of it.

The billionaire, Mark Cuban made his first million selling software. He worked as a salesman for a software store and then started his own company, which he eventually sold. Then Cuban founded  Audionet, which he sold to Yahoo for $2.6 billion. None of the companies Cuban started exist. The companies that bought his companies are all gone now, with Yahoo about to be swallowed up in a fire sale. Even the technologies he championed are now long forgotten.

Unless he uses his billions to have his name carved onto a mountain, Cuban will leave this world with nothing to show for himself, nothing anyone can point to and say, “Mark Cuban built that.” It’s unlikely that Cuban or any of the tech billionaires care about this. It is the way they want it, or at least it appears that way. That explains their zeal to erase our culture and replace it with a throw away version based in nothing but a desire to squeeze a few more drops from the societies they intend to throw away.

 

Whether you call it the technological age or the global age, these are just polite terms for cosmopolitanism, scaled to the supranational. In the city, you don’t build, you hustle. You don’t own, you rent. Nothing is permanent because a stationary target is an easy target. Instead you make what you can and you move onto the next thing. If you can shift the burden onto someone else, all the better. That’s how the game is played because in the city, everyone is a stranger.

That’s the new economy we are experiencing. No one thinks about the long term, because that’s a sucker’s play. The money is in the short hustle, You make your money and move on. The game is to pick the fruit, squeeze out all the juice and then toss away the rest, leaving it for a sucker to clean up later. The housing bubble is a good example. Everyone involved knew it was a grift. They are too smart to not have known. The game was to make money and not be the sucker left holding the bag.

I used to know someone who worked at Lotus in its heyday, so I had an interest in the company from the early days. I recall the owners turning up in local news a lot  and they were brimming with confidence. I wonder if those folks from the glory days of Lotus don’t look back with sadness at what happened to their company. They are rich men and did very well for themselves after Lotus, but still. I bet they would trade a lot to be able to walk past their old building with their old sign still over the door.

I could be all wrong and maybe they have long forgotten about their old firm. Maybe all those people simply made their money and moved on to the next thing. Men have lived their lives in order to be remembered since the dawn of time. Maybe as the Industrial Revolution resulted in different people and different social arrangements, this age is doing the same and the new man of the new economy is just a stranger passing through, uninterested in leaving footprints for future generations to examine.

The Truth About Health Care

Humans live in a finite world. The universe may be infinite, but the world of man is finite. There’s only so much stuff. Because there is only so much stuff, there’s always going to be a shortage of the stuff that people tend to like or need. It’s not always a desperate shortage, but there’s never enough so that everyone can take what they want. There’s always going to be one more hand reaching for the last item just after it is gone.

This is a basic axiom of life and one of the foundation truths of economics. It’s even a foundation truth of communism, which assumes scarcity can only be mitigated, but never fully eliminated, by the elimination of profit. Economists of all stripes work from the assumption that scarcity is an immutable fact of the human condition. The question they wrestle with is how to increase supply and distribute the results.

What this means is that all goods and services must be rationed. Since there’s never enough to meet the maximum demand, there has to be some way to say “no” to people demanding the goods or services. The most common way to do this is price. The poor guy who wants a Mercedes is told he cannot have a Mercedes by the big numbers on the price tag. This is how the supply of luxury cars is rationed.

The other way to ration goods and services is for men with guns to take control of the supply and create rules for who can and who cannot have access to the stuff.  Rocket propelled grenades are not very expensive. An RPG can be had for around $500 and the rounds are about $100. The government, at least in America, controls the supply of RPG’s and determines who can have them. In other words, the government rations the supply of RPG’s in America.

This is an iron law of economics. All goods and services are rationed. This is true for health care too. There are no exceptions to this law. Thus, the First Truth of Health Care: No health care plan or system can ever be taken seriously unless it addresses, up front, how it will say “No, you cannot have it” to people who want it. At some point, someone has to tell the patient they cannot have whatever it is they want or need.

In America, rationing is mostly done by price, but increasingly the state is taking over this role. In Britain, most people are denied services by the long lines for those services. The long wait times for basic services is a form of rationing. If you can deliver X per day and the demand is for 2X, you solve this by giving people numbers and having them wait a long time until their number is called. This is socialized medicine in nutshell.

The fact is, most people could pay out of pocket, for their health services. It is only when poor people get old or have accidents when they need someone to pay for their medical care. Most middle-class people should be able to put away a little every payday to reserve for their later years. That is, if they were not being taxed into poverty by the current system in America that has seen prices rise five times the inflation rate.

Thus, the Second Truth of Health Care: The current insurance model is just a wealth transfer from the middle-class to the health care industry, in order to cover the cost of poor people and the metastasizing layer of people who live off the system. Those is really just a tax. Most people use about 5% of their plan for themselves, the rest is used to pay for poor people and the army of people who work in the system.

That’s the thing politicians never want to discuss, which is the whole reason they are talking about health care in the first place. How does a modern society pay for the poor, who cannot afford needed medical services? How to we address the free riders on the system? More important, how much are we willing to pay for the health services to the poor? There’s a limit to all of this and that’s the question that always has to be answered.

Of course, one of the paradoxes of modern life is that you can get very rich off the poor, which is why liquor stores and furniture rental shops dot the ghetto. In the social welfare game, the point is to lay a massive guilt trip on the public, and grease the right political palms, in order to get the middle class to look the other way as their money is siphoned off for one program or another for the poor, always administered by a rich guy coincidentally.

Thus, the Third Truth of Health Care: Health services are a massive skimming operation. Today, the one area of the economy that “grows” is the health care industry. Every year, more and more people pile into that wagon, mostly in administrative roles. The number of nurses and doctors does not grow very much, but the number of bureaucrats grows like a weed.

Then you have the pill makers, machine makers, research people and lawyers. There are always lots and lots of lawyers. The health care industry is massive and government dependent. It’s why rub rooms are now called message therapy centers. They are angling to get it on the racket, by having their service declared an essential health care service. That way, you will be paying for some guy to get a happy ending.

That’s why reforming health care has become an impossibility. As soon as anyone makes any noises about fixing the system, the army of lobbyists, hired by every vested interest, shows up to bury the reformers. If they are not able to kill the idea of reform entirely, they set about corrupting it into another grift that their clients can use to get a free shot at your wallet. The only people not represented in these efforts are the voters. They get no say.

This is the main reason Trump’s efforts to address the problems of ObamaCare failed last week. What Ryan and the other crooks in the GOP were hoping to do is pass a bill that made it easier for their paymasters to skim money from the rate payers, while providing fewer services. Ryan’s bill was just an attempt to help the people feeding at the trough get a little fatter off the middle-class. Its failure suggests we have reached the end phase.

Talk to anyone responsible for paying health insurance premiums and they will tell you that the rates are reaching the point where they cannot be paid. When premiums are going up by multiples of inflation, there can be only one result. Once rates pass a certain level, people stop paying those premiums. You get black markets, non-compliance and a system that can only persist through brute coercion. Soon after you get collapse.

The Truth About Health Care

Yesterday’s post, was tangentially about health care, but it got a lot of responses about health care. It is a funny subject, in that everyone starts from the premise that everything has been the way it is now since forever. The Left has been so good at proselytizing about government run health care for the last 25 years that the public suffers from collective amnesia. We forget that no one complained about insurance very much a generation ago and no one expected miracles from medicine. Health care was just not a big topic.

After a quarter century of chanting about health care, most everyone seems to buy into the belief that it is a fountain high up on Magic Mountain. It is guarded by the twin dragons of Big Pharma and Big Insurance. The keepers of the faith sent their paladin, Barak Obama, to slay the dragons so that the people could dip their cup into the fountain of health care, getting all they need. His failure to accomplish this is proof that the dragons are mighty and therefore the most extreme weapons must be deployed.

It’s all ridiculous nonsense, of course, but that’s where we are with the topic. All goods and services are rationed. That’s an iron law of the universe. There are no exceptions. The rationing is either done though control of the supply or through price. In America, a massively convoluted system to control supply has evolved so that the people do not see the cost of health services. This lets a long list of skimmers attach themselves to the system so that prices go up, even though the quality of service often declines.

The question no one ever asks is how to make it cheaper. Follow the talking heads on the subject and they will never address making the price of services cheaper. Instead, they prattle on about access and risk pools and other terms they think sound clever. The reason is not that they view health care as a right. It is because they see it as a privilege to be dispensed by the Cloud People to the Dirt People. Allowing a free market for health services would take all the fun out of being a Cloud Person.

Even so, the goal of any health care reform should be making it cheaper, especially the common care items. The two areas where health care has gotten much better and much cheaper are dentistry and eye care, both of which are usually paid for out of pocket and have low barriers to entry. Veterinary medicine is the most obvious example of what happens to prices when you have anything resembling a marketplace. That’s also why the people in charge will never allow competition for health services. Their donors hate it.

The other aspect of health care is the quality of medicine. The truth is, the advance of medicine has been very slow and is not looking to speed up in the near future. The great leaps in health are a) diet, b) antibiotics and c) sanitation and d) a crackdown on quackery. All of these things are products of the last century. Some treatments are much better than fifty years ago, but cure rates for most diseases have not budged. Death, of course, remains a universal constant. Medical advances are glacial, not revolutionary.

As Greg Cochran pointed out the other day, a free market in medicine is probably not the answer, any more than a government monopoly has been. The truth is we don’t know a lot of about the human body and the diseases that afflict it. Genetics promises to open the door to a vast new trove of learning about human biology and medicine, but that’s not going to speed up with any government health care scheme. This is a science problem, not an economics problem and that takes the time it takes.

Finally, the problem of health insurance starts with understanding that there is no such thing as health insurance. What we have in America is an elaborate system of cost shifting. The young are forced to pay for the old. The healthy are forced to pay for the sick. The government and their buddies in the insurance business get a piece of the action. Nowhere in America can you buy insurance in case you have a stroke or just for the chance you fall off your roof.  Everyone’s plan is designed by the government.

This is a problem that is easily solved in theory, but nearly impossible to solve in reality because insurance companies have billions to spend on politicians. There’s also the fact that generations of Americans have become conditioned to having someone else pay their doctor bills. All the reforms that would work require people paying their own way and that will never happen on purpose. It’s why the current system will mostly likely stagger along until it collapses. At that point, we end up with government insurance.

That’s the truth of health care in America. The system, at its best, is a web of lies designed to shield the citizens from reality. At its worst, it is a complicated skimming operations so the people at the top can squeeze a bit more from the middle-class. It does not have to be this way, but until we resurrect the national razor, nothing substantive will change until it collapses. At which point, the “solution” will be something worse like national health care or single payer insurance.

Collateral Damage

One of the unintended consequences of a world of floating exchange rates has been the geometric growth of debt. The total amount of debt in the world currently sits at around $300 trillion, which is about three times the global GDP. That seems like an impossibility, but the value of all assets on earth is estimated to be around $300 trillion, which means every bit of potential collateral is pledged to someone, somewhere in some fashion. The world is literally drowning in debt, you could say.

Of course, those are just guesses. Some debt is actually listed as both an asset and a liability. Your mortgage is most likely in some sort of synthetic financial instrument as an asset against which there is some form of debt. Government bonds are used for collateral, as they are often considered the most reliable and trustworthy asset on earth. Banks soak up US debt, for example, because it is worth more to the bank than their cash deposits, as they can quickly package bonds into other financial transactions like repo agreements.

It’s also why the US government has no trouble finding willing lenders, despite having record debt and deficits. Those lenders are holding cash, which is not as valuable to them as the bonds. It’s not just the US government. The Germans also enjoy high demand for their debt. In Europe, the German Bund is the preferred collateral in finance transactions. In fact, it is so valuable, there is a shortage of it. The result is there is always pressure on the European Central Bank to not hold Germans bonds.

It is an important thing to understand about the world of modern finance. It is entirely driven by debt. When company X wants to do a deal, it does not reach into its cash reserves to finance the transaction. Instead, it will pledge an asset in a repurchase agreement. This is where it agrees to sell the asset to another party, but simultaneously agrees to buy it back at some point in the future at a fixed price. This is a modern form of pawning the wife’s wedding ring. The company gets the cash and the lender gets interest.

Of course, no tree grows to the sky, but the modern financial system is counting on debt being the exception.

Down in the depths of Europe’s financial system, a nasty blockage is building. The plumbers at the European Central Bank meet next week to try and fix it.

They may be four days too late. Italy’s referendum could just stretch the system to breaking point before then.

At stake is the health of the 5 trillion-euro ($5.3 trillion) securities lending market, which greases the wheels of all manner of derivative, short-selling and structured transactions. A crunch point has arrived in Europe. The last few days have seen an extreme spike in demand in particular for short-dated German government bonds.

These are among the few securities of high enough quality to be accepted as collateral in repurchase agreements. Cash is no good (well, not for the Bundesbank anyway). These agreements operate like high-quality loans whose proceeds are normally used for activities like financing the purchase of other securities. Without them, a lot of other everyday activities — such as bidding at bond auctions and hedging underwriting risk — could seize up.

The demand spike is from the usual year-end surge in demand for collateral getting pulled forward, and has exacerbated a shortage of securities that count as collateral.

In normal times, firms borrow the securities they need and quickly return them — there’s usually a flood of lending and borrowing going on, and the repo market operates silently in the background of Europe’s financial system.

But the ECB’s drive to jump start the economy has led it to buy up about 20 percent of the market for German bunds and other top-quality securities. Schatz — German government bonds of a two-year maturity — had become notably harder to come by. Firms can borrow them from the ECB, but only on the strictest of conditions. The Bundesbank has been even more resistant: it’s long been reluctant to accept any kind of collateral of lesser quality than German government bonds.

What all that means is the modern financial system has come to rely so heavily on government debt that governments cannot issue enough of it. The trouble is, government debt can take cash from the economy. This is fine when the economy is overheated or there is inflation. Central banks can step in and sell their bond holdings to soak up the excess cash. That’s not the case today anywhere in the world. Instead, governments are looking to boost the retail economy by getting more cash into the system.

The result is an unsolvable conflict. On the one had we have a financial system demanding ever more high quality debt, in order to drive growth in asset values. On the other hand, we have a retail economy demanding more cash moving around in the system in order to stimulate economic growth. It’s why smart guys like James Rickards see a financial crisis in the near future. The methods to paper over this inherent conflict are just a delaying action. At some point, the pressure exceeds the restraints and you get a crisis.

An organized unwinding of trillions in debt is never going to happen, so that means we will have a disorganized unwinding of trillions in debt. That’s the definition of a crisis. It is the unexpected, disorganized unraveling of something that probably should never have been allowed to happen. The mortgage crisis is the most recent example. Lending billions to people, who have no way to repay the loans, turned out to be a bad idea. In the fullness of time, the mortgage crisis will be seen as a warning, one everyone ignored.

The High Cost of Free Trade

The Wall Street Journal has a story on the troubles facing Chinese tech giant Huawei as it tries to enter the US mobile phone market.

A Chinese technology giant, whose telecom networking equipment is shut out of the U.S. due to security concerns, is bringing its high-end smartphone to American consumers for the first time.

But a number of obstacles are blocking Huawei Technologies Co.’s path to success in the U.S. smartphone market.

U.S. carriers, which distribute more than 80% of handsets in the country, are reluctant to work with Huawei—the world’s third-largest smartphone maker by shipments behind Samsung Electronics Co. and Apple Inc.—because of its low brand recognition and security concerns associated with its networking equipment, people familiar with the matter say. A 2012 congressional report recommended that U.S. carriers avoid using Huawei gear in their networks for fear that China might use it to spy on Americans. Huawei has denied such accusations, saying it operates independently of Beijing.

Much of what goes on in the modern age requires people to deny observable reality. China is an authoritarian state, run by a military government, that is highly paranoid of the outside world. Paranoia about the non-Chinese world is a feature of Chinese culture, a permanent feature. The type of government can change, but the Chinese elite will always view the rest of the world as smelly barbarians that must be kept under control. China is probably the most chauvinistic society on earth.

The result of this is that no Chinese firm operates independent of Beijing. Any company large enough to export to the rest of the world, or import from the rest of the world, is in bed with the Chinese government. More important, any tech firm big enough to play on the global stage is deeply connected to the Chinese military, because they could not be so big without the blessing and active support of the People’s Liberation Army. This is something everyone knows, except for the writers of the Wall Street Journal.

The result is trade with China comes with a hidden cost. If you move your electronics making factory to China, they will steal your technology. They will also do things like bake spyware and back doors into networking gear so the the PLA can exploit US communications networks. That means the US has to spend billions in counter-espionage activities in order to prevent the Chinese from running off with all of our secrets. This is just one example of the hidden costs of trade with China.

It’s not just China. We have so-called free trade with Mexico. The result was not trade in the way normal people think of it. What happened was dirty US manufacturers located their plants to Mexico. Companies looking to game the labor laws followed soon after. Mexico is not selling us more stuff and buying more of our stuff. Mexico is just a loophole in US labor and environmental laws. If you make lead-acid batteries, for example, putting the battery plant in Mexico in the right move.

The problem is those environmental costs don’t go away. The Mexican government estimates that 10% of their GDP is lost due to the effects of environmental degradation. Go to Mexico City and the air is like soup. Of course, environmental degradation does not stay local. Air pollution in one place goes global as the winds change. The fevered attempts to ban your car and lawnmower in order to reduce carbon emissions are mostly due to “developing” countries like China and Mexico.

Of course, you also have the labor problem. Making car batteries in the US means people working in a car battery factory. Move those jobs to Mexico and we do get slightly cheaper car batteries, but we get more unemployed people. The unemployed car battery worker is not taking up a self-actualizing career at the George Mason economics department. He’s going on the dole or drifting down the economic scale. At low levels, the trade-offs seem worthwhile, but once you scale this up the costs metastasize.

There’s also another hidden cost to free trade. Donald Trump rode to the White House on the promise of reorienting trade in the patriotic direction. All the beautiful people thought the issue was settled. Everyone they knew was a free trader. The same was true in Britain with regards to EU membership. Open borders and free trade are obviously all good with no bad, according to the beautiful people. In both cases, the Dirt People had other ideas and rallied to the banner of patriotic trade and nationalism.

The reason for this is so-called free trade erodes public trust. People assume politicians are crooked and dishonest. Even so, they expect their government to put their interests, the nation’s interests, ahead of the interests of foreigners. They may be crooks, but they are our crooks. Free trade and open borders break that contract as the state ends up siding with strangers over the citizens. The citizens soon begin to question the value of citizenship and their support for the state. The consequences are inevitable.

A good rule of life is that anytime a well understood word suddenly gets a modifier, you know a caper is afoot. Trade is something people always understood. One group of people trades their excess for the excess of another group of people. Mexico sends Canada sombreros, while the Canadians send Mexico beaver hats. Free-trade is something else entirely. It is a collection of loopholes, so well-connected industries can get all the benefits of the state, but shift the costs onto others. Those cost are often quite high.

Trade between nations is a good thing. America selling pop culture to China makes it tough for China to be bellicose and belligerent. China selling cheap manufactured good to America prevents domestic firms from becoming lazy and stupid. American cars are vastly better due to competition with Japan. China scrupulously looks out for her interests and America should do the same. If that means the snowflakes on campus have to pay a little more for their iPhone, so be it. In the long run, it is a bargain for them and their countrymen.

We Still Have A Word For It

I’ve always been a skeptic of Facebook, mostly because I don’t understand how they make money. I mean, I know how they make money, but I don’t know why they make money. It’s just a crappy platform for the technologically inept to post pictures of their cat. Facebook charges companies a fee so they can put ads next to the picture of your cat, but why those companies do it is a mystery to me. The whole thing depends upon ordinary people being interesting and looking at those ads, which no one does.

You can’t cheat an honest man and the companies buying ads on Facebook are not Boy Scouts so it is no wonder that Mark Zuckerberg has been hustling them.

Mark Zuckerberg has a credibility problem.

The tech mogul’s Facebook just admitted to finding more “bugs” in the way it measures ads — and once again, those bugs benefited Facebook.

The social-networking giant said Wednesday it has found numerous errors in the ways it calculates how many people view its ads, artificially inflating their perceived value to advertisers and publishers.

Key metrics that Facebook has exaggerated include the weekly and monthly reach of marketers’ posts, which got inflated by 33 percent and 55 percent, respectively, as the site improperly included repeat visitors in its figures.

Elsewhere, Facebook admitted to exaggerating the number of full views that video ads received, as well as time spent by users reading fast-loading “Instant Articles” for publishers including The Post and the Wall Street Journal, both of which are owned by News Corp.

Facebook insisted that the messed-up metrics — which followed the company’s admission in September that it had inflated its reporting of video viewing times to advertisers by as much as 80 percent — didn’t affect billing to publishers and advertisers.

This stuff is not new. It appears to be the business model for Facebook. This video from a couple of years ago sounds a lot like what is in the NYPost story.

Of course, we have a word for this. It’s called fraud. There was a time when something like this would have resulted in the executives at Facebook being led out in chains. Advertisers should be walking away and the stock should be tanking, but that’s not the modern age. Robbing your customers and vendors is just the way it is done at this level. You never give a sucker and even break or smarten up a chump. Ours is a grifter culture where everyone is running a scam.

Marx Was Right, Sort Of

In the Communist Manifesto, Marx described the periodic crisis of capitalism in terms of “the enforced destruction of a mass of productive forces.” Marx argued that the productive forces unleashed by capitalism eventually get out of hand and the result is excess, thus collapsing the value of the means of production. The capital classes remedy this by enforced destruction of a mass of productive forces, the conquest of new markets, and by the more thorough exploitation of existing markets.

Marx gets blamed for the 100 million or so murders committed in his name, but he did make a few insightful observations. For instance, the nature of business to ruthlessly exploit existing markets in pursuit of growth, even when it becomes self-defeating, is still true today. Similarly, business will bankrupt itself in pursuit of new markets, all in the name of growth. Much of what plagues us these days is the result of global business desperately searching for a new market to exploit. It is also at the heart of what is ailing the NFL.

A lot of people are blaming the idiotic and offensive antics of the players for the sudden drop in ratings. Football players have short careers and most end up broke soon after leaving the game, but most men envy them anyway. Boys grow up wanting to be a sports star and that admiration carries over into adulthood, long after we know the reality of sport. Colin Kaepernick disrespecting the fans and the country by kneeling during the anthem grates on people. Normal people think he is an ungrateful prick.

That may be part of the problem the NFL is facing, but my sense is the impact is trivial. Maybe it is the last straw for some people, but if you are a sports fan, you are willing to overlook the antics of the meat heads wearing your team’s colors. The individual players are not all that important to the drama. The point of professional sport is to simulate the tribal warfare for which all of us were born. Instead of defeating the neighboring tribe’s men and stealing their women, we watch our team beat their team at a ball game.

The real issue that is plaguing the NFL is they have run out of ways to separate their customers from their money. In fact, they ran out of sensible ways to do that a long time ago. That’s why they have started holding games in foreign countries. They think they can maybe find new customers to exploit. The games they hold in London, for example, cost the league millions, but they hope that Brits will get hooked on the narcotic of the NFL and cough up millions for the product. So far, no good.

As Marx observed, they are also ruthlessly trying to exploit their existing market. Go to an NFL game and you come away feeling like you have just been mugged. It’s not the absurd prices for everything. They constantly bombard the fan with marketing, because they expect the fan to commit his life to the corporate entity known as his team. Go to a Dallas Cowboy game, for example, and you are treated to a long pre-game ceremony about how you are not just a fan, you are soldier in the army of the Dallas Cowboys.

Of course, most people consume their sports via the television and that’s where you see the ravenous appetite of the NFL as they ruthlessly exploit their market. It used to be that the NFL games were played at one o’clock on Sunday afternoon. Now, there are games all day on Sunday. There’s a game on Sunday night and Monday night. Now we have a game on Thursday night. If that is not enough, there’s the NFL package for your phone, tablet and whatever else you use to consume media.

The games are now more advertising than games. As the linked article points out, the games themselves are only about 10-15 minutes of action. The rest of the presentation is fluff and most of that is advertising. There’s a play and then the refs have to hold a meeting about it. That means a break to sell product for three or four minutes. They get back to the game for a few plays and then it is time to have a break for more commercials. It’s why the Red Zone Channel is so popular. It has no ads.

The NFL is in many ways emblematic of the modern credit economy. Rich guys buy the teams on borrowed money at artificially low interest rates. They don’t really care that much about the cash flow, like a normal business. Their game is to inflate the value of the franchise over the duration of their investment. To do that means maximizing the “brand” and that costs money, which is why they load up their product with ads to the point where it is more ads than product. The NFL is a big bust out.

What’s happening to the NFL is their endless pursuit of growth has put the live product out of reach for most people. The TV version is exhausting the viewers with marketing and advertising. In an effort to fully exploit its market, it is destroying the desirability of the product. This is not exactly as Marx imagined the crisis of capitalism, but it is a good lesson on the fantasy of endless growth. The whole point of the NFL as a business is to get bigger and that cannot go on forever.

This does not mean the NFL is about to go out of business, but it serves as a useful lesson about the limits of the asset model. The modern credit economy is based on the idea that asset values can grow forever, therefore the credit base can grow forever. The NFL is based on the same premise. In both cases, the effort to keep the fantasy alive in the face of objective reality, is doing more harm than good. The question is how long does it take the people in charge to figure it out.

 

I Bring Bad Tidings

Recently, I was involved, in a limited basis, with a bankruptcy. The company that went belly up had over a million dollars in debts and no assets. Most of their debt was in the form of accounts receivable, but they had some loans and leases as well. Up until the point they filed for bankruptcy protection, they had paid all of their bills on time. In fact, they paid most vendors in ten days, something that is just about unheard of these days. This prompt payment is what led their vendors to be so generous with them.

This story reminded me of something that happened years ago. There was a house party at a mansion (are there mansion parties?) and many party goers were out on a balcony of some sort that extended over the pool area. The balcony was large enough to hold dozens of people, but it started to give way due to the mass of people. Panic set in and that made things worse as the frightened party goers scrambled to get off the balcony. The whole thing collapsed and took a bunch of people down in the process.

The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them. The vendors extended terms to that business saw that they paid in ten days and that others were more than happy to extend credit, so they did the same. The party goers saw everyone else out on the balcony and just assumed it must be safe. They never stopped to think that maybe it was not built to hold a hundred people. In both cases, when reality came rushing in, there was a rush to the exit.

That’s something I think about when I read stories like this regarding the global economy. The entirety of the world economy is built on one thing. That is the rock solid belief that the US government will never miss a debt payment and never devalue the dollar to arrest its debt. The entire global economy is built on the asset value of US Treasuries. If there ever comes a time when people begin to doubt the security of that debt, the panic will plunge the world into a new dark age or possible something worse.

The people in charge of the Federal Reserve understand this. The people running the ECB know this. The PBOC knows this. The masters of the universe all agree on one thing and that is they have to protect the foundation stone of the world economy. Guarding the underlying stability of the financial system is their overriding concern. That means they are willing to risk recession and maybe worse in order to protect the asset system. It’s not unreasonable from their perspective, but it does reveal the bigger problem.

That bigger problem is we have reached the logical end point of the credit economy. If the US economy does lurch into recession, the world economy will follow. The central banks will not have many options as they have used all of their big tools to prop up the asset base over the last decade. The Fed can lower rates a bit and maybe restart their Quantitative Easing program, but they will have little or no success in blunting a recession. The world will just have to wait it out and hope for the best.

That is not how the world ever works. A 2017 recession will cause the new US president to propose “solutions” and new governments in Europe will demand relief from Brussels. Bad economics always leads to worse politics and the politics of the West are already fairly rotten. The rise of nationalist and populist parties in Europe will only complicate an already fragile set of arrangements. Imagine if something like a Syriza were to take over the Italian government just as the world is headed to recession. Fun times.

The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit. With recession looming, the ability of central bankers to blunt it with credit issuance is limited. That means it becomes a political problem. The record of politicians coming up with useful reforms in times of crisis is not good. What’s needed is a sustained and organized retreat from a money system that has outlived its usefulness, but that is probably impossible. Instead it means a disorganized and haphazard retreat.

As Evans-Pritchard concludes in his story, the possible outcomes are mostly grim with some of them very grim. If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond with massive spending of money that does not exist. That could unleash price inflation and a collapse of asset values. It’s not guaranteed, but the fact that it is one possible outcome is grim news in itself. The future is grim and things will mostly likely be worse than we expect.

The Corporate State

The other day, someone was telling me about their troubles getting fraudulent charges removed from their credit card. It started with a $499 charge for some sort of AT&T service. He called his bank and was told he needed to call the merchant that put through the charge. After a number of phone calls, he was put in touch with someone that tried to talk him out of a refund. After some angry words, he got the the charges reversed and a credit to his account.

Somewhere in the process, he spotted some more fraud charges, so he was back hassling with the bank and vendors getting those off his card. Those charges were for shoes and clothes he did not buy. Talking to the merchants, he discovered that the items were being shipped to an address in another state so he asked if he should notify the police. The merchant laughed and said they don’t do that. They just try to notify the shipper to have the items returned. Otherwise, it is just a loss.

I would imagine everyone reading this has had a similar hassle with this type of theft. I once had a bunch of weird charges show up on my Verizon bill. It was a cramming deal and it took weeks to get the things off my bill. Verizon was in on it somehow and they eventually got hit with a civil suit. I called the attorney general, but I quickly learned they had no interest. They only take on small fries they can push a around. A big company like Verizon operates outside the law.

Now, I did get my money back from Verizon and my acquaintance got his money back on his credit card. I’m guessing he had half a day of time in hassling with the bank. I had a few hours yelling at the dirt bags in Verizon customer service. In my case, I had gone to a paperless bill. I had to jump through hoops to get an actual paper bill sent to me again so I could begin watching the bills for this sort of scam. Verizon works very hard to conceal the details from their customers and this is why.

This sort of theft is just a fact of life everyone accepts. The police no longer investigate most property crimes and they rarely go after the organized scammers, like the crammers working the telephone bills. The on-line merchants that get hit by credit card scammers just accept a certain amount of loss and bake it into the cost of doing business. Even the banks assume losses due to electronic theft. All of these losses are socialized, spread around to all of us in the form of interest and fees.

It’s not just that they are socialized. Increasingly, government is handing the responsibility of policing society over to corporations. That’s what happened when the government had Yahoo monitor their e-mail system without a warrant. They basically deputized the corporation so they could do the policing. Cities and counties all over America have outsourced traffic enforcement to private enterprise. These companies get the right to tax speeders and red light runners by using cameras to catch them.

This happens with other types of crime too. If my vehicle is stolen, the cops do not look for it. Instead, the insurance companies now organize the hunt for car theft rings. In many parts of the country, the cops no longer investigate home robberies until the insurance companies step in with evidence of a pattern. Since filing a claim with your insurer is mostly likely going to result in a rate hike, many people don’t bother calling the cops at all. There’s little benefit and lots of hassle.

This is another facet of anarcho-tyranny. It’s not just that the state has stopped doing the basic duties of government. They have subtly outsourced them to cartels with the power to tax all of us in order to socialize the cost of crime. As we saw with the Yahoo case, the logical next step is to give corporations the power to police. You may never be arrested by Google or Apple, but they will be the ones that report you to those with the power to arrest you, most likely a contractor, too.

Sam Francis imagined a more Orwellian end result than we are seeing. The end game appears to be a corporate state that is legitimized by the law, but fully de-legitimized in practice. On the one hand you have management that wears the synthetic mask of enthusiasm, as they go from meeting to meeting, figuring out how to obliquely enforce policy. On the other hand you have the lower ranks, grimly going through the motions in order to avoid interaction with management.