The Pressure Cooker

Posted on May 5, 2021 by thezman

A universal truth of life is that pressure reveals character. This is not only true in individuals, but it is also true in societies. When times are easy, all sorts of undesirable things can be overlooked. The petty corruption in government is not a big deal in a booming economy. Inequality is ignored, maybe even celebrated when times are good, because people think their time will come. It is when things turn down that all of a sudden, those issues rise up and take up people’s attention.

For the American economy, the good times have been rolling for such a long time now that it feels like the natural state of affairs. There was the very minor recession in the early 1990’s, but that was a blip. The dot-com bust at the end of the 1990’s and the mortgage crisis in 2008 were serious, but they did not impact most people. The stock markets went down, but they recovered. Some people suffered for sure, but the system seemed to right itself and for most people it was a non-event.

In fact, the two big economic crises of the last forty years are a proof that the system and the people running are just fine. This was why many middle-class people were angry at the lock downs initially. They thought it would harm the economy. When the Fed flew in on its magic carpet, showering the economy with magic fairy dust, those people relaxed and trusted the system. Those initial protests that popped up all around the country faded away in a fog of economic stimulus.

Good times do not last forever, even in an honest economy. The signs are everywhere now that this economy is headed for some tough times. Food prices are jumping like we have not seen since the 1970’s. There are strange shortages of products like beer and plastic goods. There is plenty of beer. The issue is the containers. Aluminum shortages and problems in the supply chain mean certain brands are not on the shelf. This leads to greater sales of other brands until they run low.

Inflation is one of those things that everyone feels. Even if you are a rich guy, you notice that steak is more expensive. The money is meaningless to you, but the price hike does not go unnoticed. Poor people, of course, feel it straight away. As a result, everyone starts to notice things in the market, like the shrinkflation, for example. A pint of ice cream is 14-ounces now. The potato chip bag is much larger, but there are fewer chips inside the bag. This stuff gets more obvious in bad times.

The thing is, prices going up because of demand or shortages is an honest result that people may not like, but they can accept. Changing the shape of containers to make it look bigger, but reducing the contents is dishonest. It is a fraud. Inflation will bring new scrutiny to this practice that has become common. This sort of institutional fraud is everywhere, but it has gone unnoticed for decades. With inflation, people will start noticing and they will not like it.

The institutional fraud is not just a retail phenomenon. It is everywhere. The hot new scam on Wall Street is the SPAC. This is where a company wants to go public, but their financials are not good enough for an IPO. A group of insiders then creates a shell company for the purpose of making acquisitions. It raises a bunch of money, then it goes public and soon after buys the company that wished to go public. It is how we end up with $100m sandwich shops in New Jersey.

Of course, the elephant in the room for close to a generation now is the gross inequality we see in modern America. The gap between the rich and the middle has never been larger, and it is growing quickly. Unlike the robber barons of the industrial age, these new oligarchs operate like pirates. They steal everything. Worse yet, they have unleashed a well-funded army of radical harpies to hound decent people in their work, their entertainments, and their private lives.

In good times, no one cares about billionaires. If your life is good and getting better, why should you care if some other guy is doing better? That flips around quickly when your life is suddenly under economic strain. The Democrats can yack about taxing the rich and the Republicans can lecture about class envy, but class consciousness is always a result of tough economic times. Everyone starts feeling working class in bad times, even when they are well-equipped to weather the storm.

The point is a lot of bad things have crept into the system over the last forty years of relatively stable times. As long as material concerns were met, people overlooked the fraud, the corruption, and the inequality. That long run of good times has meant the stock of these things is higher than ever. When bad times come, those problems will come roaring to the front of people’s minds. In other words, the sticker shock we are experiencing can quickly give way to a culture shock.

There is one other item to consider. The middle-class is older than ever. Those Baby Boomers on fixed incomes, checking the stock market every day are not going to take inflation very well. They will not handle the necessary correction in the stock market to ring out the fraud. Inflation and what is required to tame it will bring with it the wrath of the angry Boomer. The generational divide that has been nursed by the usual suspects will suddenly get very real if the economy goes south this summer.

Similarly, the political class is old now too. Will those angry Boomers passively accept the leadership of Joe Biden in a crisis? Can a generation of politicians selected for their mendacity and obsequiousness gain the trust of the public in a crisis? If the economy tanks this summer, the incompetence and corruption in Washington will become the only thing that matters in politics. In other words, bad times will bring all of these problems to the front in a time of dwindling tolerance for it.

The American empire is old now and that means a lot of bad habits have been normalized over the years. Shrinkflation, SPACs, media mendacity, inequality and political corruption are all troublesome alone. Over the decades, we have an abundance of all of them. They remain in the background as long as the markets are up, and we have cheap goods on the shelves. The pressure of bad times, however, will inevitably reveal the character of the empire. It will not end well.

The crackdown by the oligarchs on dissidents has had the happy result of a proliferation of new ways to support your favorite creator. If you like my work and wish to kick in a few bucks, you can buy me a beer. You can sign up for a SubscribeStar subscription and get some extra content. You can donate via PayPal. My crypto addresses are here for those who prefer that option. You can send gold bars to: Z Media LLC P.O. Box 432 Cockeysville, MD 21030-0432. Thank you for your support!

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Cruel Summer

Posted on April 29, 2021 by thezman

Way back when the Covid panic began, smart people pointed out that shutting down an economy was going to have unforeseen consequences. A modern economy is an incomprehensibly complex organism. Even turning off some parts of it for a short time will change the organism, resulting in downstream changes. It is why people who work with complex things are very careful about the changes they make. They accept that there is much about the system that they cannot known in advance.

Of course, the people in charge are sure they have it all figured out, so they just blundered ahead with their lock downs and new rules. Shutting down most of the restaurant industry and closing the schools. for example, radically altered the demand side of the food market. Suddenly, goods for the restaurant business had no demand, while demand for home products shot through the roof. This should have given them pause, but they kept blundering ahead with their schemes.

Anyone who has been in a grocery store of late knows that food prices are jumping like it is the 1970’s again. There are also weird shortages. Something like mayonnaise will disappear from the shelves for a week and then come back, but then plastic bags become scarce. The same phenomenon is happening with other things like building supplies and petroleum products. The official statistics are complete nonsense, so we have no idea how much food has jumped. It is enough that people are talking about inflation in private conversations for the first time in decades.

The usual suspects, of course, are spilling into the streets to chant about fiat currency, hyperinflation, and the rest of their stuff. It is as if the Great Pumpkin has finally risen out of the pumpkin patch. They have been waiting their whole lives for the Weimar moment foretold in the prophesies. Because these people are always wrong it is good to remember they are wrong now. The problem now is actually much worse than too much money chasing too few goods. It is systemic.

For starters, governments around the world have been taking sledgehammers to the global supply chain. These supply chains evolved over a long period of time to solve the problems of getting goods to the market. In response to Covid, government willy-nilly started turning things on and off without much thought. The system can respond to short term emergencies like natural disasters, but it was never equipped to respond to random outages imposed by people who have never had a job.

Then you have the stimulus plans. Having idled large swaths of the economy for periods, the same people frantically turning things on and off started pumping money into the retail side. At first this new money was absorbed in the system. Personal debt fell in 2020 as people got conservative in the face of the crisis. They also began to change their lives in response to the lockdowns. Going to the movies and out to eat is a habit, not a necessity. Lots of habits changed in 2020.

Labor markets have been radically changed by Covid and the efforts from the rulers to make a big show of dealing with it. Entry level jobs are now hard to fill, because unemployment still pays very well. If you are a restaurant opening for the first time in a year, finding help is difficult. It is not a shortage of labor as much as a shortage of people ready to go back to work. Labor shortages, however, they are created, result in a spike in labor costs, which appear at the cash register.

Finally, we have monetary policy. Central bank policy has evolved over the last thirty years based on certain assumptions. Government policy, for example, has been predictable going back to the 1990’s. While there have been the usual problems, the global economy has settled into some predictable patterns. All of a sudden, none of this is true, so monetary policy has to adjust. Adjusting to erratic government behavior and unpredictable consequences in the economy is practically impossible.

The upshot to all of this is we are seeing real inflation for the first time in generations, but we have a variety of causes this time. In the 1970’s, it was too much money chasing too few goods. Pulling money out of the economy was painful, but it worked. This time, we have too much money in some areas, but we have broken supply chains and labor markets contributing to the problem. The Fed cannot do anything about shortages of aluminum cans or chicken farm with too few chickens.

To make matters worse, pulling money out of the system is probably not possible, given decades of ultra-low borrowing rates. The world has become so accustomed to low interest rates, it has become an axiom, like the changing of the seasons or the laws of thermodynamics. Any significant change in the money supply to combat retail inflation would send the financial markets into a tailspin. Housing would collapse if mortgage rates returned to anything resembling normal.

None of this means there is no answer. Often, the right answer is to do nothing and let things run their course. That was the right answer with Covid. As with Covid, the rulers cannot accept that answer, so they will thrash around some more. The people animating the corpse of Joe Biden are promising to smash things up some more for the greater good. After all, what matters to them is that we know the people in the mansions and castles really care about us, while they live like royalty.

The result of all this is we are heading into a cruel summer. The bill for the Covid response is coming due. How a society responds to crisis is the result of the social trust in that society. America is a low trust society now. Further, the people who will be counted on to dig out of the mess created by the rulers are now treated like second class citizens by those rulers. The fix to the 60’s and 70’s was to first repair the loss of faith in the system. It is hard to imagine that happening this time.

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The Last Link

Posted on April 1, 2021 by thezman

Way back in the early days of the conservative movement, it was assumed that Federal spending was both unsustainable and damaging to the country. Cutting the size and scope of government was their thing. The tool they eventually settled on to reduce Federal spending was taxes. If they made high taxes so unpopular with the public, the Left could not keep raising taxes. If they could not raise taxes to cover their spending, they would eventually have to yield to the mathematics.

Obviously, that never happened. The big tax reforms of the 1980’s did simplify taxes and lower rates on rich people, but revenues remained stable. At the same time, spending kept growing. One of the unspoken truths of fiscal policy is the percent of GDP that is consumed by Federal taxes does not change much of time. The range is between 15% to 18%, depending on when tax policy was changed. This is the logic of the flat tax. One rate, no deductions and no more IRS.

Spending, of course, keeps going up, no matter who is in office. Despite their rhetoric, the Republicans are the big spenders. In the 1980’s they had to spend on the military to win the Cold War. In the Bush years it was the crusades against Islam. It is only when a Democrat is in the White House that the Republicans get tight-fisted, and even that is mostly ceremonial, as we have seen with the last Covid bill. It turns out that there is no relationship between taxes and spending.

Another shibboleth of conservatives is that eventually the bond markets will force a haircut on the government. The so-called bond vigilantes will drive up interest rates, which will make borrowing more expensive. The theory here is that there is a hard limit on debt. Once that limit is reached, spending must go down or taxes must go up in order to reconcile the books. Like the belief that taxes will curtail spending, faith in the mythological bond vigilantes has been misplaced.

Of course, you can go back further and find arguments from the hard money crowd about the limits of fiat currency. There was an argument in the old days that said fiat currency not only unleashes spending and inflation, but it eventually makes the money worthless, thus bankrupting the state. We have been off the gold standard for a very long time now and none of the predictions came true. The spending continues, the borrowing continues, and the money creation continues.

The gold bugs have now moved to crypto currency as the savior. Once everyone is using digital money that is outside the control of the state, then we end up with a de facto gold standard. That will force fiscal discipline on the state, which means radically reducing spending. The fact that this will never happen has so far not dimmed the enthusiasm, but like all of the other schemes to cut spending, this one will prove no match for the animal cunning of the ruling class.

There is another theory related to money. The monetarists have always argued that sound monetary policy would impose discipline on the state. Since central banks are independent of the state, they can maintain a stable money supply. While not the same as a gold standard, sound monetary policy has similar effects. That has turned out to be a myth as well. The Fed is now captive to the spending frenzy of Washington, finding new ways to underwrite trillions in new outlays.

Now, there are those who will keep lighting candles for their favorite theory. The gold bugs, for example, are sure hyperinflation is around the next corner. The bond vigilantes are similarly sure the next crisis will confirm their theory. The truth is though, none of these theories turned out to be true. The official debt is $28T, but that excludes things like Social Security. The real debt obligations of the Federal government are incalculable. No one knows and no one seems to care.

The lesson of the last half century is one the monetarists learned from the battles over the gold standard. If the ruler is so corrupt you need hard money to control him, your ruler is corrupt enough to find a way around the limits of hard money. It turns out our rulers are more than capable of conniving around every limit put before them. They have reached levels of corruption that were though impossible half a century ago. The display being put on now suggest they are just getting warmed up.

This rather shabby track record should raise a question. That is, is the field of economics just pseudoscientific nonsense? It has lots of complexity and lots of very clever solutions to the complex problems it unearths, but outside of the most basic of concepts like supply and demand, economics is not very useful. In all of the important things, it turns out to be wrong. Astrologers have a better record than economists, because they know they are grifters, not scientists.

Putting that aside, the lesson here is that contra the libertarians, economics is downstream from politics. No amount of fiddling with the tax code can fix the defects of the political class. Even further, the right people in a corrupt system cannot correct the defects of the corrupt system. This is why the people come and go in Washington, but the corruption rolls on unimpeded. In the great chain of causality, economics is the last link in that chain. It is the final effect of a chain of many causes.

A new year brings new changes. The same is true for this site as we adjust to the reality of managerial authoritarianism. That means embracing crypto for when the inevitable happens and the traditional outlets are closed. Now more than ever it is important to support the voices that support you. Five bucks a month is not a lot to ask. If you prefer other ways of donating, look at the donate page. Thank you.

Over Supply

Posted on February 18, 2021 by thezman

Note: I have a new post up behind the green door. I’m buy a car, which I hate more than just about anything, so I will be posting about that experience for donors. Given my loathing of car buying, it will be an adventure.

One of the first lessons in economics is that demand drives supply. The more a product or service is desired, the greater the supply of it, barring some artificial constraint on supply. The relationship between supply and demand is expressed in the price for the good or service. A rising price means demand is outpacing supply and a falling price means supply is outpacing demand. If demand falls low enough, supply will disappear as there is no profit to be made in the transaction.

Supply and demand used to be an article of faith in capitalist countries, but it seems that our rulers have abandoned that axiom. Take for example labor markets. They insist that flooding the American labor market with new people from abroad will lift wages and increase employment. All that diversity will cancel out the collapse in demand relative to supply and something will happen. With regards to the labor market, the new article of faith is that unlimited supply drives up demand somehow.

Now, a lot of people think this new universal truth about the labor markets is just a trick to fool people into voting away their inheritance. Collusion between the cheap labor lobby and the cheap voter lobby has resulted in this weird libertarian argument that the old axioms about supply and demand do not apply to labor markets. That way heritage Americans will not resist the flood of foreigners into their country. That could be true, but it is not an isolated example of this new economic law.

You may have noticed that the car makers are making a big splash by announcing they will abandon the internal combustion engine within the next decade or so. Jaguar is the latest car maker to say they will stop making normal cars within the decade. They say they will be fully electric by 2025, which is not far off. Other carmakers have been less aggressive in their target date, but the general consensus is that all of them will be electric-only within the next decade.

The question no one asks is why? The embrace of electric cars has been tepid in the United States and Europe. They are an interesting experiment. If you are the sort that likes owning a novelty product, then buying a Tesla is an option. The government literally pays you to buy one, so there is that. Even so, the demand has not been great, because there is not great need for electric cars. For most people, a car is a tool and the current internal combustion models do the job perfectly well.

Then there is the fact that it is a terribly impractical thing to own at this time, as there are few charging stations and charging takes too long. More than half of US drivers cannot have a charging station at home, because they live in a rental unit. Many homeowners cannot have one because of the cost or their homes are not capable of having one installed. Then there is the power grid. Estimates range from $4 to $10 trillion to upgrade the power grid for electric cars.

This is of no concern to our rulers. They are sure that if they crank up the supply side the demand side will do something and then something else will happen and before long the roads are full of electric cars. Now, some will claim that these announcements are just like Soviet five-year plans. They are not realistic targets and the people behind them have no intention of doing what they claim. In other words, they still accept the laws of supply and demand, they just like lying.

Maybe that is true. The fake meat business, on the other hand, suggests they really believe the new economic model. Five years ago, the number of people walking around demanding a burger made from beetles that tasted just like a burger was zero. We have vegans and vegetarians, for sure, but we also have schizophrenics and manic depressives too. Mentally ill people are a part of the human condition. Normal people want to eat a balanced diet that includes meat.

Despite zero demand for meat made from grass and insects, the “Impossible Meat” racket is picking up steam. The billionaires are getting in on the racket and the Davos crowd is telling politicians it is the future. In fairness, the fake meat is not revolting, but that is not the threshold. Cat food does not taste terrible under the right conditions, but people do not want to eat that either. Fake meat is the e-book of the food business, in that it is a solution is search of a problem that was solved long ago.

These are some big recent examples, but they are part of a general trend in which the overclass abandons the laws of supply and demand. Given that market capitalism starts with supply and demand, it may be that we are now post-market societies. We are becoming something like a high-tech version of the palace economy. This was a common way to distribute goods in the Bronze Age. Given that the managerial class has a distinctive Bronze Age quality, it makes perfect sense.

On the other hand, supply driven economics has a poor history. In the 1970’s the great and the good pulled out all the stops to impose the metric system on America, but it was a complete failure. No demand meant no acceptance. The same is true of soccer and women’s sports. For half a century the great and good have been pushing these on Americans, but they remain fringe interests. Those iron laws of supply and demand, like reality itself, are resistant to wishful thinking.

The other side of this is that the people pushing these fads know this and believe they can warp reality to their will, or they are lying. Jaguar marketing is probably packed to the gills with the sort of people who live in whites-only neighborhoods, but demand the company bring in Robin DiAngelo to lecture them about their privilege. Fake meat and electric cars are just the latest boutique moral signifiers. Another turn of the wheel and some other fad will fill this role.

Of course, this raises an important question. Is it better to be ruled by maniacs who think reality is an optical illusion or is it better to be ruled by a class of sociopaths willing to lie about everything? From a moral perspective, the former is worse because they really believe in their cause. There is no reasoning with a fanatic. On the other hand, can you reason with a pathological liar? How can you know? These questions suggest that the real supply problem is at the top.

The Pirate Age

Posted on February 2, 2021 by thezman

The GameStop story, which is becoming more of a general short squeeze story, is a good example of what happens when an economy is fully financialized. Since there is little money to be made in making things or creating things, the best human resources flow into finance, where a bright person can get rich finding a slight imbalance in the marketplace for an asset or an error in the holdings of another player. The economy becomes a massive poker tournament with the central bank as the house.

If you step back and think about the transaction at the heart of this story, there is no moral or economic reason for it to exist. The practice of shorting a stock can have both moral and economic utility. In the former case, an investor seeing some corruption in a company or sector is letting the world know about it by betting against it with his own money. On the latter point, the blend of shorts and longs provides useful data about stocks and sectors for investors and planners.

When everyone at the table is using chips borrowed from the house and many of the whales at the table will never have to repay the house, both of these functions are flipped on their head. In the case of GameStop, some sharps were gaming the system in an effort to artificially deflate the value of otherwise good companies. GameStop is a solid little company that is an example of modern retail. They are a value-added retailer, which is the future in the world of digital commerce.

The point of the shorting activity was not to reveal some flaw in the company’s approach or signal a lack of faith in the retail sector. The point of the trade was to fool other investors into piling in on the short, so the price of the stock would collapse. This would allow the hedge funds behind this scheme to make a quick profit. The losers in this will be the people holding the stock and the company itself. Like all victims of piracy, their only crime was in trusting the system.

The neoliberal defenders of financialization will counter that the WallStreetBets activity is exactly the sort of self-regulation imagined when the process of financialization began in the 1980’s. Instead of government bureaucrats with no understanding of the market picking winners and losers, savvy players would do battle in the marketplace. In this case, clever traders saw an opportunity to raid the pirate ships raiding companies like GameStop and they carried off some booty for themselves.

This sounds great, if you are a pirate. There is no doubt that the people involved here love the action in the same way gamblers love it when some guy is on a huge roll at the craps table. It is an exhilarating drama, even for the observers. The thing is most people are not pirates and have no interest in being pirates. More important, they do not wish to be ruled by pirates. They do not want to live in a world of no fixed rules, just the shifting standards of the pirates making war in the economy.

This brings us to the purpose of having markets and rules to govern trade between people within a society. In order to have a society with any chance of survival, you have to have rules governing exchange between members. Otherwise, your society is a war of all against all. This opens the prospect of outsiders exploiting these constant divisions in order to conquer or destroy your society. Obviously, you want to prevent this, so the rules are designed to reduce division.

Put another way, economics is a tool. That tool is used to bind the people closer together, by rewarding the things that promote the common good and punishing those things that harm the common good. Inevitably, they help the society to strengthen itself against other societies. Just as males compete with one another for mates, societies compete with one another for resources and status. One is linked to the other as an immutable part of the human condition.

Neoliberalism reverses the relationship between society and economics. Instead of society wielding economics as a tool, pirates pick up parts of society and swing them around like flails at one another. In this example, a little company that probably should be private, is seeing its share prices stuffed into the cannons of financial pirates and fired at the ships of other pirates. When it is all over, the pirates will sail away to the next skirmish, while a little company lies in ruins.

This type of economics is inherently unstable. For one thing, the pirates must always be looking for new raiding opportunities. This is why the United States, the pirate’s cover of globalism, is always belching out raiding parties around the world. The quest for new plunder is insatiable. The constant war with Russia, for example, is over the pirate’s desire to financialize the vast natural resources of Russia. The Middle East is chaos, in part, because it is endlessly plundered by pirates.

More important from the perspective of the West, financialization undermines the institutions, because they become partners in the endless raiding. Instead of being the source of stability in a society, they are seen as aiding and abetting the pirates endlessly plundering the economy. Look around the West and the one universal thread is the public no longer trusts or respects its institutions. The people inside the institutions look out seeing nothing but sails on the horizon.

The age of pirates ended when the British government decided it was no longer in their interests to promote it. The British navy went out and sank pirate ships where they found them, and pirates were hung when they were caught. Eventually, order was restored to sea commerce. The modern world lacks an authority with the will and ability to bring the pirates under control. The public, on the other hand, demands such an authority, so eventually, they will find one or create one.

GameStop

Posted on January 28, 2021 by thezman

Until a few days ago, most people had no reason to think about GameStop, a retail chain that sells video games and accessories. If you have kids, you probably know the place, because your kids like to go there. Otherwise, the only reason to think about the place was to wonder how they managed to survive as a brick-and-mortar operation in a world dominated by on-line retailers. They exist as a reminder that humans still prefer in-person shopping, even if it comes at a premium.

That is the funny thing about the GameStop story. While other traditional retailers struggled to maintain margins, they are an exception. This is a company with ridiculously high margins. Even with a drop in sales due to the great reset launched by the managerial class this year, they maintained their margins. Whatever they are doing in their shops, people think it is worth a premium. Despite this, their stock was a dog, falling below $4 until the recent explosion.

It is the explosion in their share price that has them in the news. The share price as of the close of business yesterday was $347.51. The pre-market ask is $489.00 as these words are being typed. That number keeps going up, so it is not unreasonable to think that shares will be trading at or above $500 today. Everyone now wants a piece of the winningest stock since the dot-com bubble. If you had this company in your portfolio six months ago, you are a very happy investor.

Of course, this explosion in share price did not happen because everyone suddenly realized this was a great company. The story here is retail investors organizing on Reddit noticed that some big hedge funds were shorting the hell out of the stock, despite its depressed price. Shorting a stock is when you borrow shares of the stock and then sell them, hoping to buy them back at a lower price. You then return them to the lender, and you collect the difference.

These hedge funds took this a step further and borrowed shares that did not actually exist, which is called naked short selling. Basically, the center of the naked short sell is a promise to sell the shares at a price on a certain date. If the seller is unable to borrow those shares, then they must go into the market and buy them. If the price is below the promised price, no problem. If not or if the shares are simply not available to be purchased, then it is a very big problem.

This is where we are in the story of GameStop. At least one hedge fund was committed to delivering shares of this company at a few bucks per share, but now the shares are many times higher and becoming something close to unobtanium. The result is the hedge fund, Melvin Capital, has been wiped out. They had to liquidate all of their other holdings to cover their short position. Even with help from other hedge funds, they will file for bankruptcy next week.

By itself, this is an amusing story, but hardly big news. But, no one really knows if this is an isolated situation. The insiders were targeting a number of companies, hoping to jawbone down their share prices while they aggressively shorted those stocks. It is not unrealistic to think there are dozens of hedge funds out there working this grift, so this could be the tip of a much larger iceberg. The movie chain AMC Entertainment is seeing its stock follow GameStop for the same reasons.

Now, this may not sound very interesting, but even in today’s world of magical finance, math still matters. If you have to raise cash to cover your bad bet on a naked short sell, it means selling something to raise the cash. Hedge funds tend not to sell their furniture or expensive sports cars, so they sell their good holdings. Usually, they sell their best holdings, as they are the most liquid. If enough hedge funds are forced to liquidate their good holdings, those holdings will decline in price.

This is the great fear in these situations. No one knows how much exposure there is to this bad trade. That is why the general market will decline, as the robots that do almost all of the trading move into the safest of safe harbors. This, in turn, can result in selling of otherwise solid assets, simply because no one wants to be holding an asset in decline, especially in a declining market. Given the ridiculously inflated share values, this short squeeze could signal a very big correction.

It could also be a big nothing or it could mean the government comes in and makes everything right with bailouts or new rules to prevent further erosion. That really is the story here with GameStop. This revolt of small retail investors against this hedge fund is about the larger issue. The marketplace has been perverted by insiders with special access to both market makers and market regulators. The financial markets are no longer tethered to economic reality. It is just a giant bust out.

This is why this event is being compared to Gamergate. Like the populist revolts we have seen all over the culture the last ten years, this organized attack by small investors is about a larger issue. The institutions we are supposed to rely upon to regulate our lives have been corrupted by managerial insiders. Just as the marketplace of ideas is now manipulated by thugs and lunatics on behalf of the oligarchs, the financial markets have become a grift operated by wealthy insiders.

What this means, of course, is that the insiders getting hurt in this will go to their colleagues in the ruling class and have the insurgents crushed. These people will be pushed off public forums, have their accounts closed by the trading companies and some will probably be arrested on made up charges. In a society where mocking the rulers on Twitter could get you ten years in prison, anything is possible. The ruling class will not be mocked or defied.

On the other hand, it is great example of how to resist managerial tyrants. These people will not be talked out of their corruption. They have no scruples, so they cannot be shamed into doing the right thing. They have real power, so they cannot be removed from their positions. The only course is to drive up the cost for them. Throwing sand in the gears whenever possible drives up the cost of rule. Eventually, the managerial state becomes the naked short sell and has to be liquidated.

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Money Talk

Posted on January 6, 2021 by thezman

The magical fairy dust known as Bitcoin is back in the news as its price has soared to a record high in the last few weeks. Currently one bitcoin is worth 35,000 USD, which is close to double its value of a month ago. If last spring, when the Covid panic hit, you decided to get into Bitcoin, thinking it was a safe haven for your money, your return would now sit at 700%. Of course, if you were an early adopter when the price was a few hundred dollars, then you are now quite rich.

Of course, whenever Bitcoin is on the rise, the paladins of cryptocurrency are out evangelizing about the glorious future where currency is no longer controlled by those evil bankers rubbing their hands in their secret lair. Karl Thorburn has been making the rounds on this side of the great divide. Here is a podcast he did with Greg Johnson last week that is worth a listen. Bitcoin is popular among dissidents, because the bankers cannot get you deplatformed from it like they do with credit cards.

One problem with Bitcoin is right there in those huge gains. There are wild swings in its value as people rush in and out of it. Three years ago, Bitcoin had a similar surge then lost half its value over the next six months. A similar boom and bust happened the following year. As a means of exchange, it suffers from the same problem that all commodities suffer. That is, it tends to increase in value over time, but it also suffers from the cyclical tendency we see in these booms and busts.

One reason for this is that all cryptocurrencies are designed around a math problem that gets exponentially harder to solve as time goes on. Put another way, each new coin costs more to produce than the previous coin. If the first coin cost X, the next coin costs x+n with n being the slight increase in cost to produce it. If the first ten coins average out to 10 USD and the next ten are 20 USD, then the average value of each coin has gone up by 50% just by the mere fact of their creation.

Demand for Bitcoin, however, has tendencies that do not always correspond with the supply of Bitcoins. That explains the cyclicality. For reasons that have nothing to do with the inherent value of Bitcoin, demand rises, so the price rises with it. At some point, people with Bitcoin begin to cash in and the price starts to fall, leading to a rush for the exit as we see with any asset bubble. Like hard money, Bitcoin has cyclical tendencies that get increasingly wild over time.

The other problem with Bitcoin, in terms of it replacing dollars or euros as a currency is that it is not actually money. It can be used as a medium of exchange, but only because governments tolerate it for now. Otherwise, it lacks the key attribute that has defined money since the Phrygians started producing coins. It lacks the backing of a sovereign who will enforce its value. Legal tender is an item that must be accepted as payment and that is enforced by a government with a monopoly of force.

Now, this does not mean that things like gold or precious stones cannot be used in exchange, but they are not legal tender unless the government of the jurisdiction where the exchange occurs agrees to it. In the United States, for example, it is illegal to demand payment in gold. The legal tender of the United States is those bits of metal and paper we carry around with us. A check or credit card is just involving a third-party (the bank) to pay the merchant in dollars.

Now the crypto-evangelists always respond to this point by saying that governments can’t do anything about cryptocurrencies. That’s the beauty of them. Because their creation is independent of government and their value is set in the marketplace, the state cannot prevent people from using Bitcoin. They will also note that Bitcoin is anonymous, so the state will have a tough time tracing the source of Bitcoin, even if they try to crack down on its use and possession.

This argument has several problems, one of which should be obvious. The government can simply arrest people for using Bitcoin and throw them into prison. If merchants are told it is unlawful to accept Bitcoin, they stop taking Bitcoin. There is a reason no merchant accepts gold dust for payment. Not even a pawnshop will accept gold as a form of payment and most of them trade in raw gold now. One necessary quality of money is that it be widely accepted for payment.

Governments have a primarily interest in protecting their monopoly on the supply of legal tender. This goes to something called seigniorage. This is the profit the sovereign makes from the issuing of money. In the days of gold coin, the miners of gold brought their bullion to the king’s mint, where it was turned into coins. The value of the coins was more than the value of the bullion. This is one way the king could finance his government, without having to physically control the gold supply.

In modern times, seigniorage has evolved into something else, namely the stability of the money supply, especially in relation to other currencies. A stable money supply makes for stable credit markets. The standing and legitimacy of a government is determined by the stability of its currency. This is why central banks have become the most important institutions on the planet. It is also why the major central banks will never cede control of the currency to cryptocurrency.

Note that stability does not mean fixed. The supply of money in its various forms can expand and contract. When the Fed changes interest rates, they are changing the supply of one or more forms of money. This is done in concert with the European Central Bank within an agreed upon structure. This means the supply of money is stable in that it is predictable. In the Covid crisis, everyone knew the central banks would aggressively expand the money supply in response.

The response to this is usually something about the immorality of government manipulating their currencies to finance debt. While true, the morality of the crypto advocates is not the morality of the people in charge. Since the people in charge have a monopoly of force, it is their morality that matters. The golden rule of power is that no one is ever talked out of retaining power. The United States gives up its control of the currency when someone more powerful takes it away.

There are other problems with crypto that prevent it from becoming anything more than a digital tulip bulb. Money, by definition, is self-verifying. You can examine currency and determine if it is authentic. Crypto requires a third party to validate the coin. That is done by examining its provenance. Each use becomes part of the coin’s validation, so it carries the history of its usage. The argument here is that government cannot access this, but the threat of prison will easily solve this problem.

The bottom line is money is about power. A ruler powerful enough to issue his own coin is powerful enough to enforce its use. The more powerful the king, the more valuable his coin, even outside his realm. This has always been true and will remain true. The reason the dollar is the world’s reserve currency is that the rulers of the American empire are the most powerful and the most predictable rulers on the planet. The Euro is the second reserve currency for the same reason.

That said, crypto is not worthless. For dissidents looking to get around the financial restrictions placed on them by agents of the state, crypto is a solution. If you are looking to invest in a risky asset, Bitcoin is a good play. Over time it will keep going up, but in between it will be a rollercoaster. If you like that action, then crypto is a cheap way to get it. If you want to anonymously fund a dissident, crypto is also a good way to give someone money without easily exposing your identity.

What About The Economy?

Posted on December 10, 2020 by thezman

Depending upon your age, two standard items in the news for most of your life, if not all of it, have been economic data and the stock market. The economic stagnation starting in the late 1960’s lasting into the 1980’s made the economy the top priority on everyone’s mind. Every election, it was one of the top issues. In the 80’s, Baby Boomers got into the financial markets, so the stock market and your 401K became a strange proxy for general happiness.

Something that has gone unremarked during the Trump era has been the fact that these paramount issues have dropped in priority with the media. On the Left the only thing that has mattered is hating Donald Trump and white people. On the Right, the only thing that matters is the various internal battles over what it means to be on the Right and where Trump fits into it. No one has noticed that the stock market has just about doubled in value during his presidency, despite it all.

Many on this side of the great divide mock public concern for the economy, but that is often just a pose. A primary goal of any human society is the prosperity of the people, as that is the point of human organization. Humans came together in larger and larger groups, in part, because it increased material prosperity. Even the communists were primarily focused on material prosperity. Read the book Red Plenty and you will see that no one is more materialist than a communist.

What’s odd about the sudden lack of interest in the economy and markets by ruling class media organs is that it is a central part of the Covid panic. Government shuttering businesses has to have an impact on the economy. Washington has been hurling money at the economy for a year now. The Federal Reserve’s balance sheet is probably going to top $10 Trillion to end the year. The 2020 deficit is over $3 Trillion. More money is promised for 2021, assuming current plans move forward.

Again, the massive economic upheaval caused by the government in response to Covid should be showing up in the economy and that should be news. In many cities, the restaurant industry has collapsed. San Francisco has seen an 85% decline, which is an unprecedented event. Big chains with connections into the ruling elite will survive, but the small ones will never come back. San Fran is hardly unique. The tyrant Cuomo is promising to finish off the restaurant industry in his state.

Of course, it is not all bad news. The nations rich people are doing well, which is no doubt a relief to everyone. Toll Brothers, the luxury home builder, reports they are having their best year in decades. Much of their business is around the Imperial Capital, where it is always good times, so Covid has been manna from heaven. Those trillions in new spending are laundered through Washington, so it means the locals are flush with cash for new cars and new homes.

On the flip side of this, we are seeing food lines turning up in what used to be middle-class parts of the country. Again, you would think this would be at the top of the news, but it gets limited coverage. Usually, it is someone on social media posting a picture of cars lined up at a food bank. The reason we have food lines is we have lots of people without work all of a sudden. It turns out that shutting down businesses and locking people in their homes increases unemployment.

One reason for the lack of interest in the economy is the numbers no longer make any sense to people. How can the stock market be booming when the economy is being cratered by lock downs? How can housing prices be soaring when we have food lines and massive small business failure? The official statistics are little help, as they are mostly wrong now. For a long time, the economic data was a rough approximation of the economy, but now it is just more noise from the system.

The point here is that the economy should be the big story. There are a lot of red flashing lights that suggest 2021 could make 2020 look like good times. Those millions lined up for free food are going to become a story, even if official media refuses to notice it. The collapse of small business will have a huge impact further up the supply chain in the next year. All of those closed restaurants had suppliers and those suppliers have suppliers and creditors.

The elephant in the room, of course, is the growing wealth gap in America. We are becoming a land of very rich people, a minor aristocracy we call the managerial class and then a vast population of peasants. The media is in the minor aristocracy, so from their perspective, things are doing well. They have theirs and their bosses are happy, so why bother talking about the economy? The politicians have no reason to discuss it for much the same reason. They are doing great.

Regardless, realty is that thing that does not go away when you stop believing in it and our economic reality is increasingly muddled. How long can the Federal Reserve keep buying up assets to maintain asset prices? What happens when those mortgage forbearance plans expire? Delinquency rates remain at levels you see in a severe economic crisis. How about those late rent payments? Those problems are not getting better with jobless claims going up.

The official media could ignore the economy for most of the Trump term, because the public was generally satisfied with what they were experiencing. That’s probably about to change, but they won’t have the orange man to blame for it. One consequence of the selection of the Pretender Biden is that the ruling class has no one to blame. They own it all now and if the people are not happy with the bread or the circuses, they know who is responsible for it.

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The New Economy

Posted on August 1, 2020 by thezman

Something that has been brought to the surface by the recent economic shutdown is that classical economics seems to have run out of answers. More precisely, we are seeing things today that classical and neoclassical economics said were not possible, at least not in the long term. All over the West, but particularly in the United States, we are seeing contradictions for which there are no explanations. It’s as if we have crossed into a new world that operates by different economic rules.

The best example of this is the debt carried by governments. For a long time, it was assumed that debt levels approaching GDP were unsustainable. In war time or a national crisis, a nation could run up huge debts, but must immediately address those debts after the crisis had passed. This meant austerity or inflation. Today, Japan has debt over 200% of GDP. Greece is at 170% and Italy at 130%. The United States was at 110% before the recent economic calamity.

Those who cling to the old economics keep predicting that sovereign debt will be the downfall of the West, but that’s like predicting rain in Arizona. Eventually, the prediction comes true, but when is what matters. As the John Maynard Keynes famously said, “In the long run we’re all dead.” Maybe there is some point where these debt levels have to be addressed, but everyone used to know this was not possible. Within living memory, trillion-dollar Federal deficits were said to be impossible.

All around the modern economy we see things that should not be happening. America has seen 50 million people file for unemployment. The streets are empty during work days in most cities. It has been an article of faith that wide-scale unemployment would lead to unrest. Instead of marches by unemployed workers, we have riots by the delinquent children of the ruling class. They are not demanding jobs. Instead, the jobless are watching the shenanigans on television.

Similarly, the stock markets are doing the opposite of what economics has said should happen on the cusp of a long depression. Apple became the world’s first trillion-dollar public company on Thursday, as a rise in its share price pushed it past the previously unthinkable valuation. This is a company that makes luxury goods financed on retail debt. Their core market is now unemployed. How is it possible for a “Good Time Charlie” business to boom in a depression?

There may be ways to explain these and other phenomena within the old rules of economics, but those patches to the old theory just create new contradictions that have to be addressed with new patches. It may simply be that the West, having moved past scarcity, has entered into a new world of economics. Just as quantum physics takes over for classical physics at the atomic level, the new economics takes over for the old economics at the post-scarcity barrier.

An example brought up in this brilliant discussion (Video and MP3) on modern finance is the elevation of transaction-creation over capital formation. A company like Tesla has a ridiculously high valuation, despite its many problems, because it creates lots of transactions and creates potential transactions. Everything from government credits to complex financial instruments are spun off by the activity of the firm. As a result, it creates lots of downstream financial activity.

Compared to an old school car maker, Tesla makes little sense. The old school car maker was focused on building cars, which meant they focused on all of the processes to building a car, like supply chains and managing factories. As a result, they had massive balance sheets. The real value of the company was the massive array of assets it owned to build and sell cars. Tesla, in contrast, has a tiny balance sheet, as it is focused on generating economic activity.

The elevation of the transaction over capital formation is one of the unremarked aspects of the new economy. Wealth is now generated by either creating new ways to move information around the system or maintaining a gate through which information must flow to some other part of the system. In the new economy, information can be knowledge about some future transaction or the store of old information in a wealth containment vehicle, like money, assets, credit and so forth.

In the new economics, the demand for genuine innovation, the overcoming of scarcity in some way, is in low demand. Instead, the economy is dominated by middlemen who benefit from each transaction. Therefore, the innovator is one who comes up with a new way to accelerate the movement of information in the system, thus increasing the number of transactions. Facebook is worth billions not because it has a great product or service. Its value is in its ability to generate transactions.

Another aspect of the new economics that seems to contradict the old rules is the rise of credit as an asset. All over the global financial system credit sits on the books of banks, hedge funds and companies as an asset. The asset is taken at face value and often the nature of it is unknown. This was obvious in the mortgage crisis when debt holders had no idea what was in those mortgage pools. Credit is now just another store of information in the financial system.

In fact, certain types of debt are the preferred store of information. The financial system has an unquenchable thirst for US treasuries. Federal debt is now over 26 trillion, a number thought unimaginable just a few decades ago. When you add in unfunded Social Security and Medicare liability, the debt is multiples of that total. Despite this staggering debt load, United States treasuries remain the preferred collateral in the financial system. They are better than actual money.

An irony of this new post-scarcity economic order is that it seems to be evolving toward something closer to the old palace economies of the Bronze Age. All over the economy we see a great consolidation. Amazon is close to half the retail economy now. Five big banks control more than 90% of the financial system. The tech oligarchs are close to having a monopoly on the public square. In their respected spheres, everything flows into them and is distributed out as they see fit.

We have quickly moved from a situation where these new economic models were too fragile to regulate to a situation where they are too big to regulate. In fact, the phrase “too big to fail” is now just an accepted truth of the current age. Like the palace economies, these institutions are not here to serve society. American society now exists to serve these new institutions. As a result, these institutions are actively shaping our behavior to create transactions that serve their needs.

Whether or not this is sustainable is unknown. People who want to the think it cannot go on will find reasons to believe that. The answer though lies in whether this model can last in a world of informational symmetry. As automation takes over the economic system, will there be a way to create more transactions. After all, the robots will reach a point where they know the market value of all items before the market is set. No robot will be able to fool the other robots.

That is another aspect of the new economy that goes unexamined. It is just assumed that automation will idle the human assets the ruling class does not like. In realty, it will be the information class that suffers the most. In a world where financial transactions are conducted among algorithms on the block-chain, what is the need for guys working the phones in a brokerage? How would trades even happen if both sides know the future price of the item being traded?

As with anything new, there are more unknown things than known things. The new field of quantum economics is an effort to take methods and ideas from quantum physics to model economic activity. It starts from the observation that something like the efficient market theory contradicts the assumption that humans are rational and will attempt to maximize their utility. People know the odds, but they keep going to the casino anyway, buying sports cars and following new trends.

There’s also the possibility that reality has simply gone on holiday and will return to put all of this back in order. Some unknown crisis will reveal the massive cracks in the foundation of the current economic model. Everyone will suddenly snap out of the fog of plenty and rush for the exits. After all, the Bronze Age economic model was unable to hold up under the pressure of the Sea People. The current economic model may simply collapse under the weight of a billion Africans.

Media Update: The guys at Myth of the 20th Century had me on as a guest to talk about various things related to economics. I appreciate them having me on. They do a lot of interesting stuff, so I hope everyone will check out their material. Like so many, they have been condemned to the valley of the damned. That means no YouTube of Twitter, but you can download the latest episode here. They also have a Bitchute channel and a D-Tube channel.

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Covid Capitalism

Posted on July 16, 2020 by thezman

For most people, buying a car is not a pleasant experience. Getting a new car is always nice, even if you are not a car person, but the process of getting it is almost always a hassle due to how cars are sold in America. Getting a used car can eliminate the hassle of the dealership, but then you have to worry about getting hustled by someone trying to unload their lemon onto a sucker. The car market is extreme capitalism, where no one gives a sucker an even break or smartens up a chump.

Strangely, this makes it the ideal place to understand what has happened to our society over the last six months. For example, every car dealership website now has a prominent banner informing the visitor just how much the car dealer cares about the health and safety of their customers. There’s usually a link to their page detailing just how much they care about you, the sap they hope will buy a car from them. All of these mission statements are titled, “Our Response to COVID-19.”

In case it is not obvious, a business built around the phrase caveat emptor is not concerned about the safety of anyone, even the employees. Like every business in extreme capitalist America, the car dealers see an angle in presenting themselves as guardians of public health. At the far end of capitalism, the business must be both rapacious and patronizing. Telling you how much they care about your welfare while stripping you of what they can is the standard business model.

The thing about all of this that goes unnoticed is how predatory economics has not just been normalized, it is now celebrated. Forty years ago, soulless money grasping was seen as immoral. The movie Wall Street presented a morality tale about how extreme capitalism was soul destroying. Today, the ruthless businessman is in the morally superior position, while the person doubting the ethics of his behavior is portrayed as a naive and stupid person, possibly even dangerous.

Maybe it is just a case of monkey see, monkey do with these dealers, but all of their steps to show just how much they care are the same across the board. They have “contactless” car buying, which is a very strange thing, when you consider it. How much physical contact would one normally have with the the car salesman under normal conditions? Of course, since their goal is to screw the customer, maybe this is a strange inside joke or possibly a cry for help.

Of course, all of this is just a racket and everyone gets it, except for the people firmly in the panic camp. They see it as confirmation. In fact, that’s the point of all these ads from giant corporations telling us how much they care about us and the communities they are destroying. It is pure partisanship. On one side there are the people sure this pandemic is punishment for Trump. On the other side are people who are sure the other side is using the virus to advance their ideological goals.

This is the world of today. There are now two camps of people. One camp consumes every event and metabolizes it into fuel for their ideological war. As soon as the virus became news their chief concern was in how to turn it into another weapon in their social war to control society. As soon as the hated Trump declared his side on the virus issue, the Left immediately embraced a set of positions on the virus. Every left-wing and adjacent governor blew up his state to spite Trump.

The second camp are the people who realize that the new issue is becoming politicized and they form up an opposition to the Left. In the case of the virus, they started as curious or maybe mildly skeptical. These were the people who said it was just going to be a very bad flu most likely, but we needed more information. Now they are the people who say the face muffler is the six pointed star of totalitarianism. For them, the facts of the virus no longer matter anymore.

In this environment, there’s no truth or even the desire for truth, as all truth is determined by which side of the line you stand. The car dealers, for example, would have lepers selling cars if it moved more product. It is in their interest to go along with the safety campaign, so they go along with the safety campaign. They would have their people in hazmat suits putting the buyer through a delousing station if that’s what it takes to sell cars. They care, because they don’t care.

Everywhere else, the caring capitalists are either proof that the plague is real and a punishment for the Orange Man or it is just part of the fraud perpetrated by people obsessed with hating the Orange Man. Not only does this make everything extremely simple, it means the simpletons rule the day. If you’re inclined to automatically take one side or the other based entirely on your feelings toward the people on each side of the line, this is a glorious time to be alive.

The car dealership is now the metaphor of our age. The people running it engage in the most extreme form of ruthless transactionalism. They do so while pretending they care deeply about the people they will gladly fleece. Meanwhile, on the lot, one group of buyers is misty-eyed over how much the dealer cares about this plague sent to spite the Trump people. The other group grits its teeth behind its face mufflers, fantasizing about the revolution and that sports car in the showroom.

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