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The biggest step towards the world of modern finance was the abandonment of the Bretton Woods stability framework and fixed exchange rates that took place in the 1970’s and Nixon's final nail in the coffin for gold convertibility with the US Dollar.
It was not for the reason that most believe i.e. the creation of fiat currencies but because of the creation of a new era of financial complexity. Suddenly the world had a plethora of new financial variables - exchange rates, floating rate instruments denominated in euro-currencies and I do not mean the Euro of today but the euro market that originated for dollar based deals that were outside the US jurisdiction and based in London, financial futures and swaps etc. etc.
Not only was there an explosion in the number of variables but innovative financiers began to exploit relationships within this new web of financial variables eventually creating layers of derivatives etc. This opened up the era of financial arbitrage – and allowed the smart money to think they were getting a free lunch....
Thirty years later we know that the lunch was rather expensive.
Comment by morph366 Apr 13 12:10 PM on article by Felix Salmon
The Free Lunch Seduction
I often find my thinking process stimulated by comments on Seeking Alpha. Such was the case with Morph366’s comment. We have gone through a period of nearly thirty years duration where the free lunch seduction has occurred. The ideal of working for a living was replaced by the ideal of dealing for a living. Americans bought into the concept that we could borrow our way to wealth and become rich by building houses and selling them to each other. We have outsourced what we considered “menial” labor (assembly, construction and customer service) to a flood of immigrants (many undocumented or “illegal”) and lower paid but well educated people in the former “third world” (mostly Asia).
Instead of borrowing to build the means of production, we borrowed more and more for consumption, and also for other non-productive ventures, such as buying stocks, real estate, complex financial derivatives, etc.. There is good debt and bad debt. Good debt is used to develop things of utility. Bad debt is used to increase consumption or to leverage further debt. Bad debt is what America has specialized in, on both Main Street and Wall Street.
I think a sports metaphor is appropriate. Twenty-five to thirty years ago, Americans thought they had a comfortable lead in the world economic game and felt they could “mail it in” for the next period in the game. The “all-stars” felt they could get by on show boating, on razzle-dazzle plays. As a result, a commanding lead has been surrendered to those who took the game more seriously. To get back in the game, team America must return to fundamentals, play hard as a team, and start making winning plays again.
The Wealth Effect
What has happened to the prosperity of the past thirty years? In fact, the prosperity, for most, was illusory. In early 2007 a typical American felt he (she) was making economic gains because they had a $250,000 house with a $220,000 mortgage, a retirement savings plan of $20,000, two recent model cars purchased on credit with $25,000 still owed, plus furniture, personal affects, vacations, etc. purchased on maxed out (or at least high carrying balances) credit cards. Our typical American felt they were enjoying all the trappings of wealth.
In fact, the balance sheet for this example was probably barely positive, even in early 2007. The market value of the cars was probably less than the balance owed, say $15,000. If the credit card balances totaled $15,000, the liquidation value of the “assets” purchased was probably half of those balances. The net worth would have been in the vicinity of $30,000.
Fast forward to early 2009 and the market value of the “$250,000" house is down (say about 25% to about $190,000). The retirement savings plan is cut in half. The gap between the amount owed and the market value of the cars has increased. The mortgage and credit card debt is little changed, while the personal “assets” are further lowered in value. The net worth is now in the vicinity of -$30,000.
While it is true that both snapshots (2007 and 2009) are simply “on paper”, the seduction of a sense of positive net worth has been cruelly smashed. The wealth effect has become a negative wealth effect.
The Indenture of America
Was has happened to our typical American? He (she) has in effect been put into indentured servitude. He (she) will have to work for several years to return to a positive balance sheet. Eventually, if the former behavior of living on credit is modified and there is economic recovery down the road, including a future rise in home values, our typical American will again have a positive net worth.
All this will happen, of course, if our typical American remains employed. Failing that, extended servitude or personal bankruptcy is likely, and the home could be lost to foreclosure. This is why a recovery based on saving the financial system alone will not succeed. Without jobs, there will be no recovery.
Lack of Economic Diversity
The free lunch seduction led to a lack of economic diversity. From the late 1940s to the mid-1960s, the financial sector produced an average of 12% of the earnings of the S&P 500. By the early 2000s, the financial sector exceeded 40% of the earnings of the S&P 500. This is shown in the graphs published in Simon Johnson’s article in The Atlantic Monthly, May, 2009.
Until the historic balance of economic diversity, with earnings (in a healthy economy) outside the financial sector reaching a level above 80% of all earnings, the lack of diversity will be a handicap. Production of tangible goods and services must become a higher percentage of GDP. We must lower percentage of GDP derived from paper pyramids of credit derivatives. Money should return to being a medium of exchange (the means to an end) and cease being an end objective in and of itself.
The Decline of America’s GDP
The real GDP of the U.S. has been following a declining trend line, as shown in the graph below. The black trend line shows a slight drop in GDP from 1947 through 2008. When we break the graph into two time periods, as indicated by the vertical black line, we see that there was only a slight drop in GDP 1947-1982 (red line). The steeper drop in the GDP trend line has occurred since 1983 (blue line). This coincides with the dramatic rise in the share of S&P 500 earnings accruing to the financial sector. I can attribute no cause and effect from this observation alone, but the correlation, be it coincidence or not, is clear.
click to enlarge images
It would not be unreasonable to propose that the contribution of financial sector endeavors to GDP is less than some other sectors of the economy. Banking is included in GDP only as profit and salaries. Buying and selling of stocks, other financial securities and most other assets are also not included in GDP. On the other hand, all the costs of putting together a widget are part of GDP.
The following graph indicates that the S&P 500 earnings rose along the same general trend line as GDP from 1947 through 1982. Then earnings growth underperformed GDP growth for a period of the time after 1983. So S&P 500 earnings behavior does not offer clear support for a lower “effectiveness” for the financial sector with respect to GDP looking at the first following graph.
However, a second graph that looks at S&P 500 earnings from 1988 through 2007 tells a clear story. In that graph, the higher slope of the earnings trend line indicates that, as financial sector earnings became an ever larger portion of all earnings, GDP growth did not keep up with earnings. This is a basis for arguing that the financial sector has inefficiency in contributing to GDP.
An argument might be made that resources consumed by the financial sector “froze out” other sectors from access to growth capital that could otherwise have been available. Capital consumed in creating leveraged financial instruments with the sole objective of making money could well be less efficient in producing goods and services that would increase the GDP, than would investment in the means of production, which should have a higher multiplier effect.
Personal Income
There has been a massive shift of wealth from the middle income population and the poor to the wealthy in the past 30 years. This can be seen in the changes in income distribution. The following quote from Robert Reich discusses this:
As economists Thomas Piketty and Emanuel Saez have shown, in the 1970s the top-earning 1 percent of Americans took home 8 percent of total income; as recently as 1980 they took home 9 percent. After that, total income became more and more concentrated at the top. By 2007, the top 1 percent took home over 22 percent. Meanwhile, even as their incomes dramatically increased, the total federal tax rates paid by the top 1 percent dropped. According to the Congressional Budget Office, the top 1 percent paid a total federal tax rate of 37 percent three decades ago; now it’s paying 31 percent.
The last time we reached this level of wealth concentration was in the late 1920s, just before The Great Depression. I like the metaphor comparing the economy to a poker game. (I know I have heard this from someone else, but I do not remember who, so there is no attribution.) In a poker game, the table is at first filled with many players. As the game progresses, the chips can become concentrated in fewer and fewer hands. If eventually all the chips are held by one player, the game is over.
In the following two graphs are shown the rising difference between average and median family incomes. This is an effect of the polarization of the distribution of income since the early 1980s; a small number of very high incomes increase the average, but have little impact on the median.
An example of the where the growth in high incomes has come from can be seen in the following table, data taken from the Goldman Sachs 2006 annual report.
Goldman Sachs may not represent the average for the financial sector, but they surely provide an example of income distribution that is hard to justify. Just how many goods and services of utility did these Goldman Sachs employees provide? With the average financial sector pay reaching as high recently as 180% of the average for all sectors (see the Simon Johnson graph earlier in this article), we can revisit the question of efficiency of the financial sector in increasing GDP.
One effect of the very high income levels in the financial sector would be that income that otherwise would end up as corporate earnings is, instead, used to increase the personal income of employees. We have seen in the Simon Johnson graph (earlier in this article) that financial sector average income per capita has been as high as 180% of the average of all incomes. Thus, the amount of earnings for the S&P 500 would actually have been higher over the last 20 years had financial sector compensation continued the historical pattern (prior to 1983) of tracking the average of all compensation.
The following graph shows the amount that the S&P 500 earnings would have been increased (plotted by quarters) had financial sector compensation had the same value as all compensation, with the difference accruing to corporate earnings. Remember, this was the case before 1983. If this had happened, the difference between corporate earnings growth and GDP growth would have been even greater than shown earlier. It is clear that domination of the financial sector and rapid growth in that sector diminishes growth of the economy as a whole.
The Seduction of the Example of the Successful
Another seduction is the idea that if a few become wealthy, it proves the hypothesis that anyone can get wealthy. In fact, it is my hypothesis that the utility of concentrated wealth is often diminished compared to distributed wealth. A thousand millionaires have much more economic potential than one billionaire. The very concept of capitalism is that competition produces efficiency and growth. That concept is handicapped when wealth is highly concentrated.
It is a seductive idea that because one person has accumulated wealth you can also. In fact, the accumulation of great wealth by one person diminishes the opportunity of wealth accumulation by others. (Recall the poker game metaphor.) One means of trying to diminish this effect by means other than direct confiscation (read: higher taxation) leads to the next seduction, monetary expansion.
The Monetary Expansion Seduction
Since Alan Greenspan “saved the world” with a massive liquidity response to the 1987 stock market crash, the Fed (and other central banks) have responded to every shock, large and small, with easing and monetary expansion. This type of response is appropriate when the crisis is one of liquidity but has little merit when the problem is one of solvency. We have been seduced into believing that we can be rescued from ill-conceived risk taking ventures by government and central bank action. We have been seduced by the “mother of all moral risks”. This has severe consequences, as the Japanese can witness. Gary Dorsch has written a comprehensive indictment of easy money policies.
Monetary expansion to address ill-liquidity can be targeted and controlled, so that limited inflationary impact can be realized. On the other hand, monetary expansion in response to insolvency issues across a significant scope of economic activity (like a banking system), is difficult to quantify, difficult to control with respect to long-term effects and, as a result, can have uncertain long-term consequences.
The increased monetary supply can be absorbed for an extended period of time by deleveraging. If the monetary expansion is kept short of the amount needed to actually off-set the impaired assets (the insolvency), economic activity is suppressed and deflationary pressures exist.
If the increased monetary supply is in excess of the amount needed for deleveraging, the outcome can be a painful surge of inflation down the road.
The difficulty in controlling the monetary expansion process is why an exact accounting of asset impairments (such as in bankruptcy) is necessary. Japan did not do such an accounting and has paid the price (under-expanding the money supply and stalling their growth) for more than 15 years. Sweden did such an accounting and their banking crisis (and aftereffects) passed quickly. Other countries have suffered run-away inflation when they avoided needed accounting. We still can do such an accounting, but statements from the new administration and the Fed, plus the relaxation of accounting rules (“mark-to-market”) are making the needed accounting look less likely.
We are being seduced to believe that we can solve the crisis with “easy money” and do not need to address the systemic defects that caused the current crisis. The good news: It is not too late to change course.
The Seduction of Leverage
Related to the seduction of monetary expansion, is the seduction of leverage. As leverage has become much greater in the past 25 years, the occurrence of defaults has exploded to levels not seen since the Great Depression. From gigantic derivative schemes on Wall Street all the way down to ill-advised (and fraudulent) mortgages on Main Street, the opportunity for quick profits on origination of and “flipping” assets (be they houses or derivatives), has seduced America with the siren song of easy profits. The greedy view was 1-10% capital and 90-99% credit would produce 10-100% profit with a 10% gain in asset value. When the asset instead fell 20%, the entire deal was in default.
The following graph (from Felix Salmon ) shows default rates since 1920. While your attention may be drawn to the spike to almost 16% default rate in 1932-33, the “weight” of defaults for the 24 year period 1920-1944 is actually a little less than the 24 years from 1982-2006. This has been determined by estimating the areas under the two curves. This calculation does not include the drastically higher default rates experienced in 2008 and expected for 2009 and 2010.
Summary
America, from Main Street to Wall Street, has been seduced by a free lunch mentality with regard to the use of capital. Too many came to believe that credit used for consumption or purchase of non-productive assets provided a pathway to wealth. Too few followed a path involving the use of credit to build new and improved means of production, which would have created an economic multiplier effect and true wealth.
Our government has followed a hazardous fiscal policy based on the concept that the stimulation effects of deficits could grow the economy. Growth would balance the budget. There may be times when that can occur, but we have just seen one time period where that idea was fallacious.
On Main Street, reckless borrowing by some for homes they could not afford, created a bubble of mortgage defaults, enabled by overbuilding and poor underwriting practices by mortgage brokers. Credit card debt, always a potential problem, just compounded the personal credit crisis situation.
On Wall Street, pyramids of debt, based on equity in bubbling real estate among other assets, were compounded further by highly leveraged derivative instruments, producing complex structures of interrelated obligations that could not support their own weight. The motive seems to have been, for many of these instruments, to do deals for the fees, not for deriving longer term benefit.
What we have witnessed in America is more and more monetary actions which are not part of, nor contribute directly to GDP – loans, securitized instruments, interest, appreciating assets. We have confused these with “real” accumulation of wealth.
Have you ever wondered why reselling of an asset is not in GDP? Well, it is obviously not relating to real economic growth.
America stopped saving, not because we were not a nation of savers, but because we felt we could make money in other ways. We were seduced. Saving should be a reservoir of potential production (GDP). We have been making money by buying and selling assets in a non-productive manner (stocks, financial instruments, real estate, etc.) When the value of these burst, we lost a significant portion of our GDP potential. The bottom line is we mistook money, conspicuous consumption and non-producing assets for wealth.
America, we have been seduced by mammon. It was a wild and thrilling night. But now it is morning. Mammon has fled. And we have to look at ourselves in the mirror and wonder how we could have been so gullible.
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This article has 79 comments:
Perhaps the trillions of dollars of obligations assumed by the US taxpayers could have been just mailed out as stimulus checks to restart the _real_ economy. 10 or 20 thousand per household would have been a nice down-payment on a productive economy.
if you refer to your graph on Quarterly GDP changes, you will note the reduction of volatility coincident with the change in the trend lines.
the fed has been bragging recently about how their monetary policy has made our economy more stable (until recently of course). would it not be interesting if this monetary policy not only is reducing economic volatility, but also reducing economic growth.
I suppose it's natural to resent that one person/group controls how all of that wealth is controlled, but in a meritocracy, you could argue that he who wins (by fair means, in a fair game), has proven to be best suited to continue to do so. Put another way, given that a large number of those distributed millionaires have recently and clearly proven their *inability* to manage their assets to greater opportunity creation, it makes sense why more folks listen to Soros and Buffet than to Cramer.
Granted, the assumption of winning 'by fair means, in a fair game' is another article in its own right.
thanks for the great read,
--ikk
There's a point in this I need to think about more. You said, "Have you ever wondered why reselling of an asset is not in GDP? Well, it is obviously not relating to real economic growth."
Surely the "profits" of securitization market have been included in GDP? Because it is slicing and dicing, and not pure reselling, there has been an accounting arbitrage whereby the banks recognize not only the fees, but the mark to market of the embedded derivatives. The buyer has been unaware they have overpaid, as there are only two pricing observation points - the market price and the rating. This is the toxicity in the toxic assets, more than the fact they were a bunch of "liar loans." And this is the real danger of derivatives - it allows arbitrage of accounting systems when gains on one side are recognized upfront through the mark to market of the derivative, but off balance sheet on the other side when hidden in an accrual instrument.
So, if these profits were illusory and GDP is some much driven by bank profits, what were the true GDP numbers and when did the US recession really begin? I am sure many people around the US feel it began many years before it became official.
The false gods are always the same:Greed, when economic times are good(Mammon wins) and Fear, when economic times are bad(Envy). The seducer gains and increases Power(control) in either condition.
The quote from Boethius, writing around 520 AD , says it much better " But riches are unable to quench insatiable greed; power does not make a man master of himself if he is imprisoned by the chains of wicked lusts; and when high office is bestowed on unworthy men, so far from making them worthy, it only betrays them and reveals their unworthiness".
"personal affects"
People who think like you usually believe in evolution, of which a part is the strong survive and rise to the top of the herd.
If what Robert Reich says is true, is this not what happened in America: the strong rose to the top, while the weak fell to the bottom.
What more could an evolutionist want?
Thank you for coming back to this "free lunch" imagery used in a previous article, and building on it the way you did. Your "Free Lunch Seduction" section is particularly meaningful. This article is a keeper for me who is not an economist, or a specialist from this field. You have a word in English, "GREED", we don't have in French, and it says it all, while making me more and more desesperate about human nature (am a psychologist). Thanks again.
great read john
Great article. A few weeks ago a former chief economist of the IMF published an article warning of the excessive influence of bankers/Wall St on US government policy. His conclusion was that these extremely rich people were manipulating the political system to get even richer, at the expense of the interests of the nation as a whole.
I see a couple of comments claiming you are guilty of envy of 'successful' people. If some group (bankers) enjoys such power that they can hijack government policy to enrich themselves without producing anything of value for the economy, it is not 'envy' to denounce this. If socialists hijack the US agenda and implement fiscally unaffordable universal health care, would you be guilty of 'envy' for denouncing these unearned benefits which some are given at the expense of others?
In 1848 Karl Marx noted that 'capitalism tends inevitably toward monopoly'. In the tradition of Adam Smith I think what we want is not 'capitalism' per se but free enterprise. Enterprise cannot be free and competitive in a monopoly environment If some relatively small group gains control of the monetary apparatus and concentrates economic power in a few hands, this is not free enterprise but oligarchy and tyranny.
Since the beginning the Founding Fathers have warned against this development, against the 'European banking powers' (Benjamin Franklin's term) who seek to control the issue of nations' money and thereby own and control the nation. A democratic republic has the right and duty to limit the concentration of the nation's wealth in too few hands, because overconcentration chokes out real economic development and a free market distribution of incomes.
Mammon, the god of capital, is not the god of free enterprise. We do not need to honor this false god by surrendering our economy to the clutches of Money.
I agree that the poker game metaphor does have it's limitations. As with all metaphors it risks leading the reader to an overly simplistic conclusion.
Where I think it does have merit relates to the concept of monopoly and the abuses that can result. Monopoly is like a dictatorship (here we go using dangerous metaphors again), which can be benevolent or abusive.
The entire question of dividing the pie versus growing the pie (can't we ever get away from metaphors?) is one which oversimplifies the entire nature of growth. Having a healthy economy is a process far more complex than just chosing between dividing benefits or expanding benefits. But this is another essay topic and this is only a comment so I'll stop.
Thanks for making your insightful comments.
I did not intend to slight your excellent discussion of monopoly. It was posted while I was writing my comment and so I did not see it until after posting.
Today Cam Hui quotes Simon Johnson, the IMF economist I noted above but whose name I couldn't remember. Cam's article is titled, 'A Third Way in the Current Inflation/Deflation Debate'. I think Johnson published the article in London's Financial Times.
All of those goals were exceeded, and in doing so there was probably a lot of waste, inefficiency, free lunches, inequities and all the rest. The thing is though that the American work force - which was a lot less sophisticated than it is today - knew what was expected of them and what they absolutely had to do.
And that work force responded correctly, in that it elected Mr Roosevelt four times, and when he died elected a president who was just as good - Harry Truman. What is needed now is for the electorate to respond correctly and keep people like George Bush out of the White House, and also presidential candidates who want to spend a hundred years trying to win wars that were won years ago. This not only means Mr McCain, but also President Obama. They can also forget the globalism and internationalism.
On Apr 19 05:14 AM CuriousMonkey5 wrote:
> Sorry, but conflating the credit crisis with the popular jealousy
> of wealthy people is not useful, despite what the MSM would have
> us all believe. It makes about as much sense as using poker as a
> metaphor for the economy: where the metaphor falls short is that
> our economy, unlike the fixed pool of chips in a poker game, is NOT
> a zero-sum game. Wealthy folks becoming wealthy does not mean that
> everyone else is necessarily getting poorer. Most people have their
> jobs as a direct result of a business or an industry that some wealthy
> person built. Hopefully our new "leaders" won't throw out the baby
> with the bathwater, and we will still have the freedoms and incentives
> needed to take risks and build the businesses of tomorrow. I just
> don't understand why so many otherwise-intelligent citizens think
> they're do damn cool for jumping on the "let's hate ourselves" bandwagon..
>
>
Now as to the financial sector's profits trajectory driving up the overall growth of GDP you are absolutely correct, but I see little difference in profits made from services or manufacturing. You seem to impugn some terrible results to this. I don't.
Finally, the increasing income inequality that you write so eloquently about has been going on since 1973. Many reasons for this, from the destruction of labor unions to the change in our economy from manual labor to "symbolic analysts." Most people understand that this movement is a positive movement requiring more education and engendering better working conditions for those involved.
The real cause for alarm, IMO, is the movement to 401K style retirement funds that bring the majority of the work force into the market whether they understand it or not, have the temperment or not, and the really bad advice most of these folks get.
But that is an idea for another day!
On Apr 19 10:50 AM Ferdinand E. Banks wrote:
> A little backward induction is in order here. The way to win this
> war is to make sure that there is more production of physical goods
> and the services that people in the US need, and that employment
> (in the US) increases. That is the bottom line - or as we say in
> game theory the terminal node (for this particular exercise). The
> same logic should prevail as during WW2. Franklin Roosevelt gave
> a talk a few days after the attack on Pearl Harbor in which he said
> that the US would produce X tanks per year, Y ships and Z planes.
> A Japanese engineer with whom I worked for a few months at Camp Gifu
> Japan said that this talk was beamed to him and his colleagues verbatim,
> because the Japanese government at that time considered President
> Roosevelt's goals absurd.
>
> All of those goals were exceeded, and in doing so there was probably
> a lot of waste, inefficiency, free lunches, inequities and all the
> rest. The thing is though that the American work force - which was
> a lot less sophisticated than it is today - knew what was expected
> of them and what they absolutely had to do.
>
> And that work force responded correctly, in that it elected Mr Roosevelt
> four times, and when he died elected a president who was just as
> good - Harry Truman. What is needed now is for the electorate to
> respond correctly and keep people like George Bush out of the White
> House, and also presidential candidates who want to spend a hundred
> years trying to win wars that were won years ago. This not only means
> Mr McCain, but also President Obama. They can also forget the globalism
> and internationalism.
However, the attitude that one can look through a telescope and find out the nature of the universe is fallacious. Society, even in its economic manifestations, is not merely the actions of automatons. So it's really pointless to say that t he 'economy'should have this or that characteristic (eg in order to be healthy, fair, safe, etc).
Like any human society, the US is its people. The people have democratically elected politicians at all levels. We get what we deserve. Indeed, the Darwinian analogy is tempting: in effect, survival of the fittest. The wealthy and intelligent (not a single class, mind you) have prospered these 20 years...and so they should. It's hard to argue otherwise.
In a larger sense, America's destiny is pre-determined. If Rick Perry and Texas want to secede, I really don't see any reason why we shouldn't let them. Let Texans fight foreign wars, institute a state religion, and handle their own immigration problems. Certainly a civil war is not worth the effort. There's a strong argument that the Civil War really didn't solve anything from a political standpoint -- it freed slaves but that was an insufficient condition for national success.
Is is treasonous to suggest breaking the country down into 3, 4 or more political entities? Let me give you some help: a national power grid isn't going to happen, as the states will block it.
see what happens when a nation's citizens ".... place full faith and credit in a fiat managed by a "political class". as has happened too often in history, younger generations fail to remember the lessons embodied in the government handed down from prior generations. perhaps some truth in"...past is prelude...." we repeat the same human frailty[something about seven deadly sins? greed,laziness,etc etc].
bankers and politicians make "bad" bedfellows when left to their own instincts.
we citizens get what we place priority and diligence upon.
signed: GERRY MANDER
Even using the IMF's admittedly bogus numbers (often fabricated and self-reported by countries), the U.S. is a power by any measure. If you do a head to head comparison with China, U.S. exports are still higher on a per capita basis, giving evidence of the value edge the U.S. has in its production capabilities.
But Mainstreet Americans have to take THEIR Country back from their bad Political Leadership and Wallstreet. Congress and the Gov't Financial Regulatory Agencies have been in cahoots with all the "Ponzi Banks, Ponzi Hedge Funds et al. Ponzi Finance Institiutions" that make B. Madoff look like a "little also ran". They've all become obscenely wealthy in each other's revolving door employ. Alas, like in the Great Depression, Mainstreet again ended up losers in this dirty Poker scheme.
Yet, Mainstreet America, again it's not too late to right our ship. We ARE America! We must take our great Country back. And YES WE CAN!
Much of the perceived increases in wealth seen by many Americans are delusional because people use dollars as an indication of wealth as opposed to dollar value. Using a valuation based indicator provides a more illuminating picture of how average wealth has changed with time.
For example, back in 1955, bread cost 30 cents per loaf, it now costs over $4 per loaf! So cost of bread increased by a factor of 13.1 from 1955 to 2008. Median individual yearly Income in 1955 was $4246. In order for the valuation of the dollar to keep pace, the median individual income in 2008 would have to be 13.1 X $4246 = $55,623. However, median 2008 income was $50,233. So by this "bread scale" all those increased dollars buy 10.7% less bread.
I totally agree with the conclusion of your analysis. I would like to see you expand your analysis particularly with respect to what changes need to be implemented to re-build a diverse economic engine. What sectors do we need to grow, and what kinds of improvements to our infrastructure are needed to support this revised economic engine, and how do policies like free trade and our dependence on foreign oil fit into this picture?
Yes the financial sector and excessive (and dumb) risk taking has been at the root of all the crises we have had last 20/30 years – junk bonds, S&L, LTCM, dot com, and now this. I would relate all this to advent of Greenspan with his Ayn Randian theology of self regulation. His response to every crisis – let’s throw money and postpone the day of reckoning – ultimately the day had to come.
Author points out the decline in GDP growth rate from 1983 – this is the era we were supposedly becoming productive – if so why was the growth rate declining. If we were being productive – why were we becoming less competitive – as evidenced by our trade deficits. Productivity numbers have been fed to us some kind of a lie to perpetuate this seduction.
Wall Street must be destroyed in its current from – not restructured or more regulation, unless we do that nothing is going to change. We are making no attempts to do that. We are still trying to perpetuate a failed system, the same failed regulators working with the exact same failed banksters. To quote Stiglitz (paraphrased): “The regulators are either incompetent or in the pockets of bankers. Due to the revolving door policy the mind set is – what is good for Wall Street is good for America”. This Wall Street regulator nexus must be broken.
America has to get back to Econ 101 – save -> invest -> produce; rather than borrow and consume.
On Apr 19 10:58 AM Sunnsea wrote:
> Indentured servants by definition have jobs that the wealthy "created"
> for them. We no longer want to be "indentured." That's not jealousy.
>
This is a well written, but long-winded, explanation of something an ecologist would have summarized with a roll of the eyes as 'Scavenger(trader) and predator(consumer) population grows as prey(producer) population declines.' Reverse, with the required death and pain, and repeat. Please apply to various human sub-types as your model of humanity allows.
If you are not a believer that a stable macro-organism can be created on a closed-system earth with the current constituent life forms and their evolved behaviors, one must accept that organic life, including human life, on a closed system like earth is a ponzi scheme. A continually inflating and deflating bubble.
Welcome to reality, (eco)nomists. Sorry, I didn't need any charts.
If only the Borg were here to SAVE us.
1.) "It is clear that domination of the financial sector and rapid growth in that sector diminishes growth of the economy as a whole."
---What will it take to remove control of the U.S. financial oligarchy over the U.S. political system? The present administration has also proven to be in the back pocket of this financial oligarchy which runs the country like a profit-seeking company.
Former IMF chief economist Simon Johnson says that "unless the U.S. breaks up its financial oligarchy, America could face a crisis that could, in fact, be worse than the Great Depression."
www.npr.org/templates/...
2.)"Money should return to being a medium of exchange (the means to an end) and cease being an end objective in and of itself."
----With the Federal Reserve and its other many arms (UN, CFR, WTO, NATO, IMF) controlling our currency and the world economy, how do we wrest it back?
Your distinction between good debt and bad debt was well stated and well received by this reader.
It has long been my contention that "bad " debt makes instant cowards, and eventual paupers of all who participate in it ,and seriously injures far too many innocent bystanders, which today are almost all of us.
Why do these and similar things happen?
I think it has to do mostly with the potential and makeup of the human brain, part of which is congenital , and part of which is learned.
There seems to be an inbred tendency for a certain per centage of the people to be extremely predatory in their basic makeup and mentality. I believe that , for the most part, that they were born that way.
I don't have a real number for them , but just pick a number, say 30% of the population. These are the people who are the most successful wheeler dealers and shady operators. Just to name one of many activities, they are usually extremely clever and have no trouble writing bogus contracts that would challenge the abilities of the most accomplished lawyers and accountants. They operate in every phase and facet of business , government, and politics.
Another , maybe 30% of the population, are just simply too incapable and naive to ever figure out what is going and are usually the biggest victims of the predatory class.
Another 30%, just to keep it in round numbers, are bright , hard working people who are just too busy on the treadmill of life working and trying to make a living ,raise familiers, and live the good life as much as possible.
Because of their self imposed pressures and activities, most of these are unable or unwilling to take the time and make the efforts necessary to sense and forecast danger to themselves , their families, and their nation.
This leaves roughly 10% remaining to try to figure out the dangerous, and potentially disastrous things that are going on and try to raise as many red flag alerts as possible. They are not limited to this , but they are skilled and prescient at it like few others.
You, in my assessment , with this article, have entered this group, which includes Nouriel Roubini and Nassim Taleb.
I would include the investigative reporters at PBS "Frontline' as well. There are others, more and less heralded , that are also doing excellent work,and some have written excellent books documenting their efforts..
A fine article, with a sober and realistic point of view, and I encourage you to keep up this much needed effort.
Try this good read, "Meltdown" by Thomas E. Woods Jr. --the best non-fiction book I've ever read.
while the economy may not be a zero sum game, the more wealth concentrates in the financial sector, the less growth to accommodate new players.
also:
There is a huge element of luck, even in a fair game.
Excellent point:
"it is my hypothesis that the utility of concentrated wealth is often diminished compared to distributed wealth. A thousand millionaires have much more economic potential than one billionaire."
Thanks for the book recommendation "Meltdown" by Thomas E. Woods Jr.
I will get it and read it , as the "best non fiction book you ever read" is plenty good enough reco for me. Best Regards.
Personal wealth C-man. Individual investors don't have any direct control over economic efficiency. They only have influence over their personal choices.
[citation needed]
On Apr 19 08:30 PM SeekingTruth wrote:
> To J. Lounsbury:
> Your distinction between good debt and bad debt was well stated and
> well received by this reader.
> It has long been my contention that "bad " debt makes instant cowards,
> and eventual paupers of all who participate in it ,and seriously
> injures far too many innocent bystanders, which today are almost
> all of us.
>
> Why do these and similar things happen?
>
> I think it has to do mostly with the potential and makeup of the
> human brain, part of which is congenital , and part of which is learned.
>
> There seems to be an inbred tendency for a certain per centage of
> the people to be extremely predatory in their basic makeup and mentality.
> I believe that , for the most part, that they were born that way.
>
> I don't have a real number for them , but just pick a number, say
> 30% of the population. These are the people who are the most successful
> wheeler dealers and shady operators. Just to name one of many activities,
> they are usually extremely clever and have no trouble writing bogus
> contracts that would challenge the abilities of the most accomplished
> lawyers and accountants. They operate in every phase and facet of
> business , government, and politics.
>
> Another , maybe 30% of the population, are just simply too incapable
> and naive to ever figure out what is going and are usually the biggest
> victims of the predatory class.
>
> Another 30%, just to keep it in round numbers, are bright , hard
> working people who are just too busy on the treadmill of life working
> and trying to make a living ,raise familiers, and live the good life
> as much as possible.
> Because of their self imposed pressures and activities, most of these
> are unable or unwilling to take the time and make the efforts necessary
> to sense and forecast danger to themselves , their families, and
> their nation.
>
> This leaves roughly 10% remaining to try to figure out the dangerous,
> and potentially disastrous things that are going on and try to raise
> as many red flag alerts as possible. They are not limited to this
> , but they are skilled and prescient at it like few others.
> You, in my assessment , with this article, have entered this group,
> which includes Nouriel Roubini and Nassim Taleb.
> I would include the investigative reporters at PBS "Frontline' as
> well. There are others, more and less heralded , that are also doing
> excellent work,and some have written excellent books documenting
> their efforts..
> A fine article, with a sober and realistic point of view, and I encourage
> you to keep up this much needed effort.
A) Give pound of flesh for the less then million financing I needed from angels.
B) Accept no less then $15 million from VC's meaning I would have to create a massive BURN RATE and lose operational control.
Part B really bothered me. I was being encouraged by the market to be a 'creative' accountant. I would have had to inflate the business plan out of this world. Of course, I could have jacked up a salary to $500k a year. Sound familiar with John's reporting of $691,000 per GS heacount in compensation?
I'll tell you what I did about this. I created the mechanisms and fundamental model and bootstrapped. I got on the road with sales and helped them close Fortune 1000 customers and simply waited for this horrible situation to implode, knowing the fundamental model would be in serious demand. And guess what? It is :)
Hey, we have a problem in that the state engages in both wealth obliteration and wealth transfer. The solution is NOT to give the state more power (Reich). The solution is NOT to expand the state!
You're seeing all the facts, but drawing some insane conclusions, man.
Get off the wealthy and get on with obliterating the state.
USA #1!
This is a good part of what the problem is. Americans have fallen victim to consumerism and bad economic decisions through the marketing and salesmanship of the late 20th and early 21st century, shoved in their faces by TV, radio, the Internet and every other channel imaginable. It is being sold rape as something else.
Now we have to hope that there will be more a critical assessment when it comes to the ideas of how manage one's finances and what expectations should be.
On Apr 20 11:05 AM wavelength wrote:
> Back in the early 1970s my father made me read an article by the
> feminist Germaine Greer, entitled "Seduction is a Four Letter Word".
> The four letter word in this instance was rape. I am not suggesting
> that we have not, as a society, been guilty of greed and complacency.
> On the one hand I would say that despite the cheeful collusion that
> has taken place, many working Americans are too poorly educated and
> too indoctrinated to understand what is happening. On the other,
> I can see that after our "wild and thrilling night" we are falsely
> crying rape through witch hunts over executive bonuses etc. On balance
> I would argue that yes, many were seduced, but some are simply being
> screwed over. In 24 of our 50 states, America taxes small business
> at the highest rates in the developed world. Passive investment and
> various shell games are seen as more appealing because we have a
> system where small business is punished instead of encouraged. The
> last straw has been the institution of a "blame the victim" mentality
> (also analagous to what ocurs in sexual politics) where business
> is seen as the enemy. The combination of steep economic decline with
> the triumph of the left wing propaganda machine in our schools, churches
> and public forums will leave us all royally f#^#%#ed.
On Apr 19 10:15 AM derryl wrote:
> John,
> Great article. A few weeks ago a former chief economist of the IMF
> published an article warning of the excessive influence of bankers/Wall
> St on US government policy. His conclusion was that these extremely
> rich people were manipulating the political system to get even richer,
> at the expense of the interests of the nation as a whole.
>
> I see a couple of comments claiming you are guilty of envy of 'successful'
> people. If some group (bankers) enjoys such power that they can hijack
> government policy to enrich themselves without producing anything
> of value for the economy, it is not 'envy' to denounce this. If socialists
> hijack the US agenda and implement fiscally unaffordable universal
> health care, would you be guilty of 'envy' for denouncing these unearned
> benefits which some are given at the expense of others?
>
> In 1848 Karl Marx noted that 'capitalism tends inevitably toward
> monopoly'. In the tradition of Adam Smith I think what we want is
> not 'capitalism' per se but free enterprise. Enterprise cannot be
> free and competitive in a monopoly environment If some relatively
> small group gains control of the monetary apparatus and concentrates
> economic power in a few hands, this is not free enterprise but oligarchy
> and tyranny.
>
> Since the beginning the Founding Fathers have warned against this
> development, against the 'European banking powers' (Benjamin Franklin's
> term) who seek to control the issue of nations' money and thereby
> own and control the nation. A democratic republic has the right and
> duty to limit the concentration of the nation's wealth in too few
> hands, because overconcentration chokes out real economic development
> and a free market distribution of incomes.
>
> Mammon, the god of capital, is not the god of free enterprise. We
> do not need to honor this false god by surrendering our economy to
> the clutches of Money.
oh my lord, what would Joe the Plumber say???? :-)
----------------------...
I'm not sure how typical this typical American of yours is. I'm sure a lot of people in foreign countries read claims like this and imagine America to be something far different than it is. Except for areas along the coasts and big cities, an average middle-class home goes for about $125k, not $250k. Studies show that credit card debt is concentrated in the hands of a few highly indebted individuals, who are probably not the same individuals living in $250k homes. Sure, such people probably exist, but they're not typical.
"What we have witnessed in America is more and more monetary actions which are not part of, nor contribute directly to GDP – loans, securitized instruments, interest, appreciating assets."
----------------------...
If you don't think interest-bearing loans contribute to GDP, try to build a competitive business with just the money in your checking account!
On the other hand, I understand your point about the financial services industry taking an outsized role in the US economy. Of course, various countries can develop specialties that utilize their resources. China is good at manufacturing but has few gold deposits. South Africa has gold deposits but has little oil. Saudi Arabia sells oil but does not grow rice. Perhaps the US is where you go when you need to issue bonds or to sell stock in your corporation. Perhaps that has become our international specialty. I wonder what percentage of the growth in financial services was "exported" to other countries. How many Chinese factories or Brazilian oilfields were financed through New York? What percentage of international oil trades are brokered in Chicago?
More importantly, I wonder how sustainable such a specialty is. Unlike natural resources, talented and well-educated investment bankers could pop up elsewhere just as talented software developers suddenly emerged in India! The US's recent ameteurish handling of its financial industry has certainly led the world to look around. There are plenty of countries doing a better job of educating their children who would love to become the international banking capital of the world - or even a co-capital.
IMHO, the bailout was all about keeping the power elite, elite.
Let me give you one example in another industry. In 1998, it cost $25K a month to host a website at Exodus. The same site can be hosted today by Godaddy for about $100/month. Now, anyone can create a business and run it online. Competition is what the USA is all about and it drives us to excellence and creates unimaginable opportunities. The financial services industry should have been forced to be "reborn" just like Info Tech did in 2000.
Instead, we have committed to $13T to the same financial institutions which have created the crisis, and are on the other side of the equation (i.e. instead of a $130,000 rebate, each US household is on the hook for the same amount +interest in future taxes)
On Apr 19 04:08 AM no_disclosures wrote:
> I wonder if we lost a huge opportunity last September to balance
> the economy. If we had let the "banking system" -- ie. shadow banking
> system, and American financial oligarchs fail, that graph of financial
> system profits to regular economic profits would have corrected pretty
> quickly.
>
> Perhaps the trillions of dollars of obligations assumed by the US
> taxpayers could have been just mailed out as stimulus checks to restart
> the _real_ economy. 10 or 20 thousand per household would have been
> a nice down-payment on a productive economy.
[Quote] Most people have their jobs as a direct result of a business or an industry that some wealthy person built. [Unquote]
This should actually read "Most people have their jobs as direct result of a business or an industry THAT THEY THEMSELVES BUILT"
The smart-arse at the top who manipulates and wrecks their otherwise happy lives with outrageous demands, while robbing the business through his or her pay packet and benefits, contributes little or nothing to their welfare. When the criminality at the top drives the business into bankruptcy the boss and his criminal mates should not be regarded as heroes.
If capitalism is to continue dividends on shares should be the sole basis of top level remuneration. Wages for managers who hold indecent quantities of shares should be abolished.
Executives claiming credit for the work of those below them are the parasites of the world
Friar Hilarius
I am currently writing a book on the inter-connectedness of morality and economics
If anyone has ANY input on what makes a healthy economy I would greatly value your input.
Please send contributions to healthyeconomy@gmail.com, indicating whether your thoughts may be quoted with ... or without attribution.
With Best Wishes
Friar Hilarius
Your faith in evolution is touching
I put it to you that the morally weak are over-represented among those you term strong
If as you suggest the fate of America lies in their hands, God help the weak
Friar Hilarius
You ask for positive thoughts about the future
Eliminate the credit cancer by paying off ALL debts
Never ever borrow for anything ever again
Live in communes until you can afford a house
Save to buy a car ... and until then buy a bike
Replace cars with public transport
Build safe bike-tracks ... with weather shelters / bus stops
Include bike storage on buses for when the weather turns foul
Live simpler lives
Blessings and Peace
Friar Hilarius
You are absolutely right ... Americans need to rid themselves of their entitlement psychology
There is no entitlement to an above average standard of living in a Global economy ... and for the knuckleheads ... protectionism is no answer to this issue
I recommend the book "GLOBAILITY ... Competing with Everyone from Everywhere for Everything" by Harold L. Sirkin, James W. Hemerling and Arindam K. Bhattacharya
Did you see the internet site where you can bid online for work ... where Asians were offering to work for $ 4 an hour and unemployed New Yorkers wanted $ 100 an hour?
We are all going to end up working for a global average wage for a given type of work, so you are right about job specific education ... but remember people everywhere will be doing the study so Americans had better keep pace or they will be left behind
By the way ... the world is producing heaps of things that are not really needed ... such as trashy entertainment
I would be interested in seeing what people think the world really NEEDS to produce ... a society seduced by computer games and TV trash is a sick society ... not unlike the decline of the Roman Empire where disaster followed excess luxury and aimlessness
Please send your thoughts on what America and the world really NEEDS to produce to create a healthy economy to :-
healthyeconomy@gmail.com
Blessings and Peace
Friar Hilarius
I offer you this explanation
Loss of community
We need to return to living in small communities
Large communities are an amoral disaster breeding envy
Friar Hilarius
PS Thomas have you ever considered a monastery? There is more joy in small communities than in large ones ... but you need to pick the right group of friars and nuns
Married monks are OK too if they need a wife ... but that generally means they are only part time monks :)
On Apr 20 02:23 PM ur2smrt4me wrote:
> "A thousand millionaires have much more economic potential than one
> billionaire."
>
> oh my lord, what would Joe the Plumber say???? :-)
>
Not only this money were removed from productive & wealth generating sectors of economy but this money went into creating humongous economic & political corruption.
The Wall-Street became the core of a highly malignant cancer that started to spread to all corners of American society.
As for Obama administration, they ridiculously think that Wall-Street cancer is good for America and must be preserved at any cost.
God save America. We are in a terrible danger.
Adversity toughened them and gave them an amazing ability to accept all the hardships that their lives could threw at them.
While I cannot make any honest claim that they emerged from those tough times unscathed, I do contend that they became tougher, more resilient people.
They lived out their lives, and when those lives kicked them in the teeth or knocked them down, due to one calamity or another, they picked themselves back up and kept right on going forward.
My parent persevered and endured, but those of my generation wanted more from our lives than our parents had.
Too late, I'm learning a harsh lesson about what can befall someone who isn't prepared for "the worst".
I'll admit that I'm somewhat spoiled, and, when compared to my own parents, soft in many important ways. That is bad, but not as bad as my knowing that my children and grandchildren are even softer than my wife and I.
I neglected to pass on the lessons my parents both tried to teach me, about the need to be prepared for hardship and rough seas.
I can only hope that the children of this current generation will find the inner sttrength to make themselves tough enough to come through the coming difficult times, and that our improvident ways won't be the burden on them that the Great Depression was on my parents.
I'm feeling sorry, like I said, but not for my wife or myself, because we both have had a great life to this point. My sorrow is for those who'll come after us, having inherited a mess they had no part in creating.
Nominally, since my wife and I live in our own free and clear home, have no debts, and have sufficient savings to see us through to the end of our lives, I should be happy at this point in my life, not troubled by the types of thoughts and regrets I now have. Still, I am troubled, and I fear for this country and our citizens.
Now, did their numerous other employees also play an important role and work extremely hard in building the company as well? Of course. But realize also that those latter folks only had that opportunity because someone else created that business in the first place and decided to hire them.
If you don't like what you see out there, you can go hang your own shingle. Build something better yourself. This is (still) America.
On Apr 20 05:15 PM Friar Hilarius wrote:
> From a comment above :-
>
> [Quote] Most people have their jobs as a direct result of a business
> or an industry that some wealthy person built. [Unquote]
>
> This should actually read "Most people have their jobs as direct
> result of a business or an industry THAT THEY THEMSELVES BUILT"<br/>
>
> The smart-arse at the top who manipulates and wrecks their otherwise
> happy lives with outrageous demands, while robbing the business through
> his or her pay packet and benefits, contributes little or nothing
> to their welfare. When the criminality at the top drives the business
> into bankruptcy the boss and his criminal mates should not be regarded
> as heroes.
>
> If capitalism is to continue dividends on shares should be the sole
> basis of top level remuneration. Wages for managers who hold indecent
> quantities of shares should be abolished.
>
> Executives claiming credit for the work of those below them are the
> parasites of the world
>
> Friar Hilarius
>
>
what people seek is comfort. That's what money buys.
if you compare a car from the 60's and a car from the 90's, you would agree that the last one is more technologically advanced.
I think we should put into perspective wealth growth over the years with a discounted technological progress.
If your point of view was wholly correct ... and I am sure you don't really think so ... then why are we in the mess we are in ?
Put simply many professional managers take the credit for those beneath them in the good times and run for cover in the bad times
You speak of creative entrepreneurs as though they never had to cheat or lie or deceive to get a result
Some did ... some maybe didn't
The issue I am pointing to is that creativity has been undermined by criminality as well as false claims to manage well
At no point do I say that every executive is a criminal
Yet with Saint Paul and Saint Augustine I assert that we are all sinners
The struggle between good and evil never ends
With Best Wishes
Friar Hilarius
PS What products do you think the world really needs that are not already in over-supply?
You neatly quantify the predators and the victims and others in between
What you are really depicting is the struggle between good and evil, with apathy supporting the latter
How would you set about strengthening the moral fibre of the United States of America
The young men and women who have courageously died in war, and their families, would love to know the answer ... they made the supreme sacrifice and still the criminals rule
With Best Wishes
Friar Hilarius