Category Archives: Economics

I Bring Bad Tidings

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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

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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.

A World of Problems

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Back when the Germans were threatening to shut down Greece and sell it off for parts, it was fairly obvious that there was no way to “fix” the Greek problem. Even it were possible to radically overhaul their public sector, the debt payments are too high to maintain the level of social services expected from a modern social democracy. Default was unthinkable because close to 80 percent of Greece’s public debt is owned by public institutions, primarily the EU governments and the ECB.

The “solution” was to kick the can down the road until a miracle happened, but now the problem is back.

ATHENS—Greece’s economic recovery is proving elusive, challenging the forecasts of the country’s government and foreign creditors still counting on growth reviving this year.

The International Monetary Fund said last week  that the economy is stagnating, in the first admission from creditors that Greece’s recovery is off track again. Growth will only restart next year, the head of the IMF’s team in Greece said on a conference call with reporters, without offering details.

Of particular concern is that exports, which are supposed to lead Greece out of trouble, are on a slow downward trajectory, hampered by capital controls, taxes and a lack of credit.

“There is no chance we will see a rebound unless we see some bold political decisions that would introduce a more stable business environment,” said Dimitris Tsakonitis, general manager at mining company Grecian Magnesite.

The bailout agreement between Greece and its German-led creditors assumes rapid growth from late 2016 onward, including an official forecast of 2.7% growth in 2017. Private-sector economists believe next year’s growth could be closer to 0.6%.

Weaker growth would undermine the budget, likely leading to fresh arguments with lenders about extra austerity measures.

Greece is still grappling with the measures it has already agreed to. Late on Tuesday the country’s parliament approved pension overhauls and other policy changes that have been delayed for months, holding up bailout funding.

Greek government officials are sticking to their view that the economy is on the cusp of growth. “We are at the turning point at which we can we say with certainty that we are leaving the recession behind us,” Economy Minister George Stathakis told supporters of the ruling left-wing Syriza party Sunday.

The economy will get a push from investors as of the end of the year, when lenders are expected to provide some debt relief and the country qualifies for a European Central Bank bond buyback program, Prime Minister Alexis Tsipras said in an interview with The Wall Street Journal last week.

In other words, the miracle did not happen and the problem is now worse. This comes at a time when Europe’s biggest bank is in very serious trouble.

Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender.

As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position.

European regulators and government officials have kept a low profile in public over Deutsche’s deepening woes. However, in private they have struck a sanguine tone, stressing that in extremis there is scope under European regulation to inject state funds to support the bank, provided it is done in line with market conditions.

Marcel Fratzscher, head of DIW Berlin, a think-tank, said: “If push comes to shove, the German government would contribute because Deutsche Bank is the only global bank that Germany has.”

There is one solid rule with banking and that is when the biggest bank is in trouble, all the banks are in trouble. The reason is a bank in trouble seeks to increase its cash by unwinding its holdings. This puts downward pressure on the price of those assets, which forces all banks holding similar assets to revalue and perhaps raise their cash holdings, by selling assets. This can easily set off a cascading effect, which is popularly referred to as contagion. The ghost of Lehman now haunts Deutsche Bank.

Deutsche Bank has something north of €42 Trillion in derivative exposure. To put that into perspective, the GDP of Europe is €14 Trillion. The phrase “systemic risk” is starting to pop up in news stories for obvious reasons. Presumably the German government would step in and bail out the bank, but this is the same German government that invited millions of Muslims into the country. That and no one really knows how big the problem is at Deutsche Bank. There’s nothing more dangerous in the financial world than uncertainty.

If that’s not enough to have you stocking up on potable water and MRE’s, the news brings word that the Obama Administration is trying its best to start a war with Russia over Syria. They are ending talks with the Russians over the bombing of Aleppo. The Russians are threatening to impose a no-fly zone, while John Kerry is making noises about sending troops to Syria. The US position is completely nuts, which is what makes it so dangerous. The same people who screwed this up are now tasked with avoiding a mistake that will lead to a shooting war with the Russians.

The world always has some problem that could get out of control and bring the whole thing crashing down, but the odds are usually long enough to not worry too much. Pakistan is now threatening to nuke India, but that happens often enough to not take too seriously. Pakistan’s military understands that they will lose a real war with India. India understands that they will gain nothing by winning a war against Pakistan. This is one of those problems that can be managed by the permanent diplomatic service, with little help from the political class.

The three crisis I’m following all have some things in common. One is they will require hard choices from the political class to contain. In politics, a hard choice is one that causes a politician to lose support. Merkel’s government is already teetering so how willing is she going to be to make a bold move to rescue Deutsche Bank? The ECB proved unable to deal with the Greeks the last time. If Merkel is facing a financial crisis, who will she play bad cop with the Greeks when Tsipris inevitably comes calling, demanding a break on Greek debt?

The Syria debacle is the most concerning because it resembles so many European problems of the past. There’s a Seven Year’s War quality to it where you have two main players with the rest changing teams after every stage. With the US now increasing the troop levels in nearby Iraq, presumably to fight in one theater of this conflict, the chances of a mistake increase. In these situations, mistakes are often not mistakes, but even when they are, they become reasons to abandon dialogue in favor of military options.

We live in a world of trouble. One can be forgiven for having a sense of foreboding.

The Fury of the Central Planners

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When I was out in the provinces last month, I watched a bit of the BBC and SkyNews. One of the things I found humorous about the news coverage was the hyperventilating about Brexit. Every story had a Brexit angle, even the local interest stuff. The general impression I got from the news presenters was that they were having a tough time keeping it together. At any moment they could break down into sobbing over the horrors of Brexit. If you did not know better, you would think Brexit was code for re-opening Auschwitz.

All the prophesies about the disasters that would befall the world, if the snaggletoothed yokels voted to leave Europe, have not come to pass. In fact, the early returns suggest it has been a net positive for the Brits. Time will tell how it all unfolds as there is a lot that has yet to happen. Even so, the results thus far are making the Remain side look rather foolish. Instead of accepting this reality, the true believers are carrying on like Godzilla is about to cross the Channel and attack London, because of Brexit.

This inability to accept reality is not confined to the Brits. Tyler Cowen has an unintentionally hilarious column up demanding that we believe the libertarian economists and not our lying eyes. The short version, for those uninterested in reading it, is that he and the rest of the doomsayers forgot to carry the one and the day of reckoning is actually a little ways off. But don’t you worry though. The day of reckoning is approaching and those beastly Dirt People in the accompanying picture will be held to account.

In fairness to libertarians, modern economists are not libertarians. They dress up their act with libertarian hobbyhorse items like free weed and open borders, but modern economics is managerial central planning. They are technocrats convinced they can micromanage everything through monetary and tax policy. No matter how many times they get it wrong, they remain certain they just need to tweak their models and boundless bliss will spread over the countryside. Worse still, they fully embrace the lunacy of homo economicus.

Economics, as I’m fond of saying, is the modern equivalent of astrology. Before a battle, Cyrus II of Persia would bring in his astrologers to advice him on the time and place to attack his enemy. The astrologers would figure out what he wanted to hear, consult their maps and then tell him what he wanted to hear. Cyrus was a bad ass dude, who was rarely wrong, so it was a wise course by the astrologers to tell the boss what he already knew. When he won, they got some credit and they avoided contradicting the boss.

This old story about the eminent astrologer economist Joseph Stiglitz praising the economic polices of Venezuela ten years ago is a good example. Stiglitz was telling his hosts what they wanted to hear because they were paying him to endorse their brand of lunacy. Of course, Venezuela is now headed to total collapse because their economy has ground to a halt. In an age when Mexico’s poor people are obese, Venezuela has managed to have a food shortage. Maybe the rulers should not have listened to Joseph Stiglitz.

The fascinating thing about economists is that their error rate is outlandishly high, but they never lose credibility with the rulers. Obama called in his best seers when he rose to power in 2008. They told him that borrowing a trillion dollars and blowing it on pointless projects would result in 1.5 trillion in economic activity. They called it the fiscal multiplier. One could be forgiven for thinking that this is another version of this old joke about a stranger coming into town and spending $100 at an hotel, then changing his mind.

The Obama stimulus plan was a bust, but that was never really the point anyway. Obama wanted to lavish his party with your money and he wanted to make it look like he was doing you a favor by doing it. That’s why he called in his best magicians and astrologers to give it their stamp of approval. Being right or wrong was never a concern. It never is in economics. The chief architects of the stimulus knew it was a great career move to give their stamp of approval to what was obviously just good old fashioned patronage. All of them landed prestigious jobs in the academy and Wall Street afterward.

Anyway, I suspect the fury of the central planners over Brexit has to do with fear that the scam is no longer working. Every big foot economist from the West weighed in against Brexit. They shook their staffs and promised Britain would be visited by plagues, monsters and dark spirits if they left Europe. The voters chose Brexit anyway. If you’re in the business of fooling the people on behalf of the rulers, you need to show you can fool the voters. Otherwise, the rulers have no use for you.

Follow The Money

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By the time this is posted I will be somewhere over the Atlantic on my way to Iceland. I will then move onto Ireland where I will spend a few days with the bog monkeys. Since there is some chance I may be tricked into having an adult beverage or two and thus be rendered unable to post, the following has been pre-recorded.

–Z

One of the benefits of reading lots of history is you often see the same catalysts, causes and dynamics turning up in the story. The Roman Empire had a lot of problems toward the end, but a big one was their financial structure. Their lack of money led them to do things that made their situation worse. Similarly, the French Revolution had a “want of money” angle to it. The crown was broke and did a lot of very stupid things, as a result of being broke, that compounded the many social problems brewing in the country,

It’s tempting to wonder, for example, what would have happened if Louis XIV had been a bit more prudent or showed a bit more foresight with regards to the financial system of his country. Alternatively, what would have happened if his heirs had better advisers, who would have pushed for mild steady reform in order to slowly bring the French financial system into line with the emerging modern world. Heck, what if Louis XV had simply avoided the mistake of hiring economist John Law.

The best historians, I think, look at the men of the time and ask why were they unable or unwilling to do the necessary things to avoid catastrophe. In almost all cases, there were plenty of people advising the rulers that were making a blunder. In many cases, the rulers knew they were blundering, but events constrained them from acting. In the decades leading to the French Revolution, many smart and influential people knew reform was necessary. They just did not know how to go about it or what they were able to do, within the limits placed upon them, made things worse

Anyway, that’s the vibe I get when reading these stories about the Fed and their deliberations on the economy. Due to the sensitive and precarious nature of their positions, they tend to speak in riddles, but if you are careful, you can tease out some meaning from their public statements. They are very guarded and they reserve their more candid opinions for private conversations, but they rely on the broader financial public to put pressure on policy makers. These staged events are an esoteric form of lobbying.

The United States has a Federal debt that rivals what we had while fighting two empires in World War II. Current debt is close to 100% of GDP and that was the peak during the war years. The difference is we are not battling two empires in a shooting war. Now we are maintaining a global empire. The financiers understand this difference and they certainly recognize the danger it poses. The costs of fighting Hitler and Tojo were temporary and extraordinary. The cost of empire is permanent and ordinary, at least for a while longer.

These debt levels are only possible in the artificially low interest rate environment created by the central bankers. The trouble is they appear to have gone beyond the point of diminishing returns with interest rate policy. We are effectively in a no-growth economy now, despite historically low borrowing rates at all levels. The West is not in recession nor is it facing collapse, but it is exposed. There are no financial tools left in reserve to face the next unknown financial calamity and the bankers know this.

The trouble is the cost of reform is so frightening, no one is willing to face up to it. Interest on the Federal debt is about 6% of annual spending. If borrowing rates returns to historic norms, debt service will grow rapidly. Some estimates say it would exceed 20% of the annual budget within a decade. That’s based on the assumption the economy would not collapse, but rising rates would throttle real estate, tip over bank balance sheets and send the equity markets into free fall. All the attempts to keep the plates spinning have made artificially low borrowing rates the norm. Everything is now based on it.

The Federal government is not about to go bankrupt anytime soon. Federal outlays are about 20% of GDP right now, which is more than manageable. State and local government account for another 20% or thereabouts. Government spending in Germany is at 44% at the moment. It is 44% in Britain and 52% in France. In other words, the US has the same problems we see with all social democracies, but we’re not Zimbabwe. The US dollar is also the world’s reserve currency so that gives the US a much bigger margin for error.

Still, there is a sense you get from theses statements from central bankers is that they know these artificially low borrowing rates cannot go on forever. The longer they continue, the worse it will be when they finally return to normal. It’s just that no one knows how to fix it. The political costs of inflating our way out of debt are too high. Letting rates go up means recession and political panic. A continuation of debt monetization limits the freedom of action of central banks when the next crisis arises and there will always be another crisis.

That is what most likely worries the more sober minded bankers. A decade of 4% inflation would be unpleasant politically, but not end times bad. A slow rise in interest rates would not collapse the world economy either, but it would usher in a long recession similar to the 1870’s, where asset values tumbled for a decade as the Second Industrial Revolution came to an end. The real danger is the unknown crisis that does threaten the foundations of the system and the central banks have no tools to face it.

That’s where the West is at the moment. Things are plodding along, but there’s nothing in reserve in case of a crisis. The US economy is stagnant at the moment, but if it falls into recession, there’s nothing the Fed can do about it. Negative rates are unlikely and probably not effective anyway. The Fed balance sheet is already bloated so further monetization is going to be hard. The financial system is a citadel whose walls need rebuilding, but no one has a clue as to how to go about do it.

Voluntary Obsolescence

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Way back in the olden thymes, I was chatting with an acquaintance, who owned a number of small niche publications. Each had five to ten thousand subscribers, who paid $50 per year for the publication. These were monthly hobbyist type things. Printing, postage and content costs ate up most of his revenue, but he was still able to take an upper middle-class salary from the business. He was never going to get rich from it, but he liked the action and it let him turn hobbies into a nice career.

At the time, he was telling me about his plan to move all of his magazines to the web. This was in the 90’s so it was the new thing. Newspapers and magazines were putting up websites hoping to reach a broader audience. He was very excited about it because he saw the cost savings. Printing and postage were his big line items so going digital meant a potential windfall. I remember asking him how he expected to charge people when he was putting his content on-line free of charge. He responded, “Hits. We’ll get more hits and then we can sell advertising.”

At that point I knew he and many others were about to commit suicide. I’ve been inside many banks and none of them ever accepted hits or site traffic as payment. The people rushing to shovel their content on-line simply had no idea why they were rushing to give their product away, but they were sure it was going to be glorious. The result has been the death of newspapers and many magazines. The New York Times, for example, loses money every quarter and only survives because a Mexican billionaire wants access to the American ruling class.

I get that same feeling when people talk about Uber and self-driving cars. From the perspective of an outsider, I see no reason why cities would sanction Uber or any of the other off-the-book taxi services. There’s nothing in it for the municipality. Similarly, why would any of the car companies sign off on robot cars? There’s no advantage for them to do it. Of course, taxi fleets of self-driving cars is about the nuttiest thing imaginable as it just means the death of a number of industries, namely car makers and car insurance firms.

Think about it. Your car sits unused most of the time. You take it to work where it sits all day. Then you take it home where it sits all night. You have a car for convenience, mostly. Pubic transportation,where available, is not good for running errands, going shopping or other tasks. Cabs are fine for some of it, but hailing a cab in the rain sucks compared to walking into the parking garage to get into your car. There’s a reason why rich people have car services and limos. They get the flexibility of their own vehicle with the convenience of a taxi service.

Now imagine that anywhere you are you can order up a Johnny Cab, having it pick you up and take you where you wish, at a low fee. All you do is pull out the phone and order it up and it comes by to haul you to work or take you to the market. It sounds wonderful, especially for old people and alcoholics. The question is, why own a car when you can get the service of a car, without having to own it, store it and maintain it? Hobbyists would still want a sports car or off-road vehicle, but most people have cars for practical purposes only.

Do a little math and you see that you use maybe ten percent of your car’s useful capacity. The hour commute to work and the hour home means two hours out of a day. Throw in some driving on the weekend and 90% of the time your car is sitting idle. Even assuming inefficiency, one care could serve the needs of five people, which means a world of Johnny Cabs is a world with about 80% fewer cars. That means 80% fewer car sales for the car makers. It also means 80% fewer insurance polices, tax stickers and all the other things that are based on people owning cars.

If you are in the car business, the plan should be simple. Buy enough politicians to kill off Uber and the robot car people. For their part, the pols should require little bribing as it is in their interest to kill the robot cars too. Instead, all of the car makers are announcing plans to produce robot cars aimed at the for-hire business. Uber is doing a test run in Pittsburgh with a fleet of driverless cars. Like those newspaper and magazine guys of the 90’s, the transportation industry is fashioning a noose for themselves out the new technology, so they can destroy themselves. Karl Marx must be laughing in Hell right now.

The Tragedy of the Google

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In 1833 the Victorian economist William Forster Lloyd published Two Lectures on the Checks to Population, which introduced an idea we later understood as the Tragedy of the Commons. The example used was of a common grazing area and how the interests of the people using this “free” public land would inevitably work at odds with one another in maintaining the public land. Everyone had an incentive to take as much as they could, as quickly as they could, but no one had an incentive to put back.

Today this is best understood in the management of fisheries. You can’t own parcels of the ocean and even if you can assign areas to particular fishermen, the fish don’t pay attention to these boundaries. The fisherman has no incentive to limit his cod harvest because the fish he does not catch will simply swim over to the next guy, who will catch them. In order to maintain the fishery, the state comes in and puts limits on the overall catch and what each fisherman can catch each season.

This fairly well known example is used by certain ideologues to demand socialization of all private property. Environmentalists will claim that the three-toed elephant slug is a common resource so it must be protected by the state. Therefore, anything that impacts the slug, requires permission from the state. That means if you want to mow your lawn or put up a tool shed, you have to file an environmental impact study and spend a bazillion dollars bribing environmental groups. It’s why we can’t build anything of consequence anymore.

Even though the idea has been abused, it is a useful concept when thinking about something like this story in Breitbart. Musicians are quickly seeing their revenue from music sales disappear. Newspapers all over America are near collapse because their content is distributed free on-line. Those that try to charge a fee just see the news given away by someone else, so their efforts to create property lines on-line always fail. Even the pornography industry is being gutted by a flood of free porn.

Now, the music industry has adapted to the fact Google is essentially an open air contraband market. Big shot musicians have teams of lawyers to police this stuff. The small musicians make their money from live shows and selling their music at their events. But, others don’t have this avenue. Photographers, graphic artists and writers just accept that they no longer have property rights to their work. I often see my work posted on other sites and no one from those sites asks my permission. I always give it when asked, but few bother asking.

The big internet operators and their government ignore all of this because they have grown stupendously rich off this racket. Google is essentially operating an open air contraband market with YouTube. Try running a heroin market on your property and see what happens. But, you’re not a billionaire and you can’t afford to buy a government of your own so the rules apply to you. Even banks find they have to report large movements of cash in order to help the government catch drug dealers. Ross Ulbricht is doing life in prison for being the Google of illicit drugs.

When the robot historians look back at the collapse of the West, they may point to the Internet as an institution analogous to slavery in the Roman Republic. Some argue that the flood of slaves in Rome after the victories over Corinth and Carthage altered the economic balance of Roman society. Large farmers could afford to buy up lots of slaves, thus collapsing the market for labor. This also allowed them to crush their smaller competition. The result was the rise of a landed oligarchy at the expense of the small land owners.

The Internet has brought back something that we thought was dead and that is rentier capitalism. This is the economic practice of monopolizing access to any kind of property, and gaining significant amounts of profit without contribution to society. Cable operators are a good example. In my youth, TV was free. It made it’s money from commercials. Today, you pay the monopolist a fee to get access to TV shows, that still run ads. In fact, they run even more ads than when I was a kid. In the case of kid’s shows, the programs are just ads to sell toys.

The other institution is cost shifting. The paint company that dumps its old paint into the river because it is a cheap way to get rid of the waste is shifting some of its costs to the public. Passing laws to prevent it or taxes on the paint maker to pay for the cleanup, is an effort to end the practice of cost shifting. Even today, the smallest mechanical shop complies with environmental rules because the punishments are draconian. These costs show up in the invoice to the customer. When I get my oil changed, I see an entry for oil disposal on the invoice.

The modern Internet giants shift huge chunks of their business cost to the public via all sorts of schemes. The most obvious being the internet providers. In most of the country, technology and/or the law prevents the internet provider from implementing metered service. Everyone pays the same for their internet regardless of usage. That means the guy with three teenagers that spend all day watching YouTube pays the same as the local feminist, who only goes on-line to post pictures of her cats to Facebook.

If the guy with the three kids had to pay for his usage, his bill would be five times that of the local feminist. He would also sharply limit his usage. Google and the other video providers would see their customer base shrink to the point where it may no longer make sense to exist in some cases. My first broadband bill was $12.95 per month. The cheapest in my area is now $69.95 plus a long list of fees and taxes. The service is marginally better, but not five times better. The additional cost is about me subsidizing my neighbors for the profit of the Internet companies.

Similarly, if the suppliers were charged for use of the public roadways, like we tax motorists and trucking companies, they would have to charge vastly more for their product. Instead, those costs end up in your tax bill, because, the government gives tax breaks to the internet providers. If Facebook had to build out a network to supply you their product, the cost would be prohibitive. Instead those costs end up in your cable bill, even if you have no use for Facebook. The internet economy is all about socializing the costs and privatizing the profits.

I’m going long here so let me wrap it up by summarizing a bit. We have created this virtual commons, but we have not come up with a way to manage it like a park or fishery. Further, we have permitted the development of rentiers, who skim from the public good, but contribute very little to it. Worse yet, we have massive cost shifting with the profits going to expand and perpetuate a system that works against the interests of the people. When a firm that made its money from cat videos can dictate terms to the US government, we’re well past the tragedy of the commons and into techno-feudalism.

Dismal Quackery

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The other day, I made a crack about the soft sciences, psychology, sociology and so forth, comparing them to astrology and economics. It was in the context of the replication crisis that is roiling fields like psychology. The soft sciences are trying hard to pretend it is problem in all science, but that is not true. Anyway, someone gave me grief for slandering astrology, because the early strides in astronomy and even astrophysics were due to people trying to improve astrology. If you believe in that stuff, precise measuring of the movement of stars and planets is important.

I think most empirically minded people have long ago concluded that psychology is quackery. When I was a kid, talk therapy was the rage. The schools were hiring “counselors” and having kids sit down and talk about their problems. Even as a kid I knew it was nonsense. Talking someone out of being insane or depressed is slightly less nutty than slaughtering a goat and reading the entrails. Imagine if someone claimed they could talk you out of a broken leg or cancer. Quackery seems to stick around much longer than logic says it should.

That is the pattern we are seeing with economics. The colossal errors in the field should have discredited it a long time ago, but economist are still the court magicians of the modern state. This post by Tyler Cowen is a good example of dressing up uninformed opinion with the jargon of economics to make it sound like science. As Steve Sailer pointed out in the comments, economists have yet to offer a plausible explanation for how the post-nationalist world could operate. The only possible answer is that it would be based on force.

Europe is a great example of just how wrong modern economics has been about pretty much everything. The totality of mainstream economics has been cheering the Euro project for decades, even when it was pretty clear that the single currency was a disaster for many of the members. It has all the cyclical defects of hard money and none of the benefits. The open borders part of the project has resulted in a flood of non-Europeans, who have upset the social order, threatening the stability of the Continent.

This is not the first time modern economics has been outlandishly wrong about Europe. This post by Greg Cochran is a great reminder of just how absurdly wrong the field was about the realities of communism. The best estimates by the court magicians overstated communist economic output by two or three times reality. This despite the fact they had firsthand observations of the state of these communist countries. Westerners, including western academics, traveled throughout these countries and could observe the squalor firsthand.

In the 80’s, an acquaintance was getting sent to Moscow on government assignment. His family held a going away party as he was expected to be there for two years. Everyone was asked to bring something he could use in Russia. He got things like cartons of cigarettes, blue jeans and small bottles of liquor. The Russians turned a blind eye to this type of smuggling because they wanted the stuff too. The customs agent would take something for himself and maybe set you up with his cousin Yuri to sell the rest. Everyone, except economists, knew the score.

Of course, the birth of economics as a distinct field from political-economy was roughly one hundred years ago, with the publication of an economic textbook by Alfred Marshall. Economist were just as wrong about reality then as they are today. Prior to the Great War, globalism was all the rage, just as it is today. A 1910 best-selling book, The Great Illusion, used economic arguments to demonstrate that territorial conquest had become unprofitable, and therefore global capitalism had removed the risk of major wars. A few years later Europe was murdering itself in the worst war in human history.

Science gets lots of things wrong. The scientific method assumes this, which is why test results are published, along with the methods, so others can challenge the results. Negative results are still results and add to the stock of human knowledge. In economics, they get fundamental elements of their field wrong and manage to subtract from the stock of human knowledge in the process. The problems facing Europe today are problems people understood well 50 years ago. Thanks to economics, policy makers are now forced to relearn what their grandparents took for granted.

The root of the problem is that statistics are not science and economics is pretty much just statistics applied to commerce. It is not worthless, but it is limited. Probability and correlation can point real scientist in the right direction, but they do not explain the mechanics of cause and effect. We know that smoking correlates with emphysema, but biologists figured out why one causes the other. Per capita chicken consumption correlates with US oil imports and only an economist would suggest one causes the other. Know what is happening is different from knowing why.

Calling back to where we started, most quackery manages to have some benefit, even if it is to just some make people feel happy. Astrology is right about the movement of the stars, at least as far as charting them. Horoscopes are stupid, but a harmless way for people to feel good about the uncertainty of life. Alchemy was a confidence racket, for the most part, but it eventually gave us chemistry. Even climate science has some utility, despite the massive fraud. Economists are fond of calling their racket the dismal science, but that is not fair or accurate. It is really just dismal quackery.

Guaranteed Basic Income

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“‘It seemed to me that I had happened upon humanity upon the wane. The ruddy sunset set me thinking of the sunset of mankind. For the first time I began to realize an odd consequence of the social effort in which we are at present engaged. And yet, come to think, it is a logical consequence enough. Strength is the outcome of need; security sets a premium on feebleness. The work of ameliorating the conditions of life—the true civilizing process that makes life more and more secure— had gone steadily on to a climax. One triumph of a united humanity over Nature had followed another. Things that are now mere dreams had become projects deliberately put in hand and carried forward. And the harvest was what I saw!”

–Time Machine

The Swiss are voting on a referendum that if passed, would require the state to supply every Swiss citizen a basic income of 2,500 Swiss francs per month. That is roughly $2500 or £1,755. This story in the BBC does a respectable job of covering the topic. The news suggests the referendum has little chance of passing. The Swiss are a practical people and this proposal has too many unanswered questions. That and the proponents are something less than assuring.

These proposals are following the typical course of reform efforts. They bounce around the academy for a while as intellectuals work over the concepts. Then they are sold to the political class in fits and starts. If the political class is resistant, then maybe an activist group or industry group is enlisted to move the effort. Over time, what was once a radical idea is being discussed by respectable people. Before long, the debate is over who can best implement the new idea.

There are some good arguments in favor of the guaranteed basic income. One is it is simple. Like the flat tax, the GBI replaces the myriad of welfare programs and the government vipers that come with them. The other point in its favor is it addresses the growing problem of mass unemployment. In the robot future, most people do not work so this solves the problem of people not having a way to earn money. There is also the fact that it is value neutral. People get the money to spend on whatever they wish, without the nanny state harassing them.

There are many arguments against it, with the most obvious being that welfare programs never go away. In America, the US Congress has repealed exactly one welfare program in the last century. The WPA was passed in the 1930’s and later replaced by Comprehensive Employment and Training Act, which was such a hilarious disaster, it was replaced by a program called the Jobs Training Partnership Act. That was eventually repealed in the 90’s. That is a long time to kill one horrible welfare program.

The most likely result, at least in America, is a basic income on top of existing welfare programs. There are seventy-nine means tested welfare programs in America. Everyone of those programs has a federal agency employing thousands of people who do nothing but administer welfare programs. Congress will get rid of those right after they do something about the unicorn infestation. Until the inevitable fiscal crisis forces a mass retrenchment of industrial era government programs, there will be no reform of welfare in America.

Putting that aside, there are other problems. Spend time in the ghetto and you see the effects of the dole on the human spirit. A man not working quickly falls into bad habits. Families dependent on public money soon start to act like zoo animals, because they are essentially zoo animals. The state gives them an allowance, tells them how to spend it and supervises their living conditions. Granted, most got into that state because they lack the ability to manage their own affairs, but the corrosive effects of dependency are well known.

Even so, for all of human history, nature solved the problem of too many people by killing off the excess people either through famine, warfare or migration. In other words, supplying enough food, shelter, water and security for the population required all hands on deck. If a society out bred its resource supply, then that meant starvation or expanding territory through conquest in order to get more resources. Often, it just meant killing off a lot of people in wars over resources, thus solving the problem.

We are now able to produce all the food we need long into the future. More important, automated food production is well on the path to producing all the food we could ever need with very little human labor. The robot future has been discussed to death at this point, but even allowing for a fair bit of hyperbole in the predictions, we are facing a future where human labor is decreasingly necessary. That means the value of human capital will plummet, assuming the current economic models.

In a world of scarcity, society can carry the old and very young, along with a ruling elite. The modern industrial society could carry many more people who produced nothing because technology made those who did produce vastly more productive. Welfare programs knocked the edges off the inequality by transferring wealth from the rich to the poor. In the mature technological society, vast numbers will be idle, but provided for as there will be more than enough resources.

How that is resolved will be the greatest intellectual challenge in human history.

Inequality

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For generations, Americans, who rejected liberalism, were trained to screech and run out of the room whenever the topic of inequality was raised. After all, anything other than a natural distribution of wealth was socialism and if nothing else, conservative means not being a socialist. It’s fundamentally the problem with all reactionary ideology and why Buckley Conservatism has degraded into a shabby libertarianism, lacking anything resembling a coherent worldview.

The issue of inequality is a perfect example. That French economist wrote a big book on the topic and the response from the Right was to dismiss it without having read it. The libertarian wing thumbed through some reviews so they could pretend to have read it, before dismissing it in a shower of platitudes. They have to pretend inequality is not a real issue because to do otherwise means confronting the contradictions in their ideological safe space.

The fact is, having a small number of people or corporations controlling the nation’s wealth ends in tyranny. This is the lesson of history. If one man owns everything then you have Africa. If a cabal of men control everything through a bureaucracy you have China. The West figured out that a broad distribution of ownership cultivates human capital and maximizes individual liberty. It’s not perfect, but there is a reason we never speak of the African Renaissance.

Part of why both parties are being swamped by what they like to call the fringe is stories like this one.

The rising cash holdings of U.S. corporations are increasingly in the hands of a few U.S. companies, with just five tech firms having grabbed a third of it. And nearly three-quarters of cash held by non-financial U.S. companies is stashed overseas, outside the long arm of Uncle Sam.

Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Cisco Systems (CSCO)and Oracle (ORCL) are sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015, according to an analysis released Friday by ratings agency Moody’s Investors Service.  That’s even more cash concentration than in previous years, as these five companies held 27% of cash in 2014 and 25% in 2013. Apple alone is holding more cash and investments than eight of the 10 entire industry sectors.

Corporate America’s rising pile of cash is becoming increasingly important to investors as profit growth and the stock market stalls. The amount of cash held by U.S. companies rose 1.8% in 2015. Unfortunately for U.S. investors, 72% of total cash held by all non-financial U.S. companies is stockpiled outside the U.S., up from 64% in 2014 and 58% in 2013, as companies try to avoid paying U.S. tax rates.

There was a time when Democrats would make an issue of this based on old school appeals to class. “Look at these fat cats robbing the working man!” The Right was not mute on this stuff either. Wholesale tax avoidance was not always a conservative principle. Conservatives would also note that these firms are run by progressive, nation wrecking wackos. But, that was when conservatives still thought countries were real things.

The reason Faceberg gets to summon media whores like Glenn Beck to his lair and demand they stop talking about his censoring of opinion is because he has 40 billion dollars. He is also allowed to have free access to the internet by the state. The reason for the gross corruption of the popular media is that those concentrated billions can be funneled into operations that buy news reporters and outlets, in addition to politicians.

It’s something I’ve been repeating for a while now, but I enjoy repeating it. Buckley Conservatism was always about anti-communism first and foremost. The whole point of their ideology was to shape the defense of the West against Soviet communism. Reagan is a perfect example. He was willing to concede domestic policy to the Democrats in order to have a free hand on foreign policy. The result was a continuation of the welfare state in exchange for a military buildup.

The problem for the Buckley types is the Cold War ended. Generations of conservative “intellectuals” have been trained to cede cultural issues to the Left. Their default response on domestic issues is to surrender so they can get back to talking foreign policy. It’s made them incapable of fighting a culture war. Those principled conservatives are too busy planning the sack of Carthage to be bothered by the Left’s assault on decency.

It’s why they are being swamped by what we’re calling the alt-right. Talking about special treatment of carried interest to a guy who is watching his town be overrun by foreigners is insulting. That’s why Trump was able to shove everyone aside and win the nomination. Watching those debates, I was reminded of the movie Pleasantville. In this case, Trump was the only guy in color and the rest were in black and white.

Conservatism used to focus itself on maintaining and defending the culture and traditions of the country. Allowing a handful of financial buccaneers, who got rich plundering the economy while riding a sea of credit money created by the state, is the antithesis of conservatism. It conserves nothing. Dealing with these extremes is something the Right cannot cede to the Left or you end up like Venezuela.