A Brief History of Relatively Recent Economics
If you have been paying attention to our system of rigged economics for the past few decades then you are probably concerned that The Great Recession is ramping up for version 2.0 The Return of the Great Depression. The Chinese economy is facing serious challenges towards its growth, the falling price of oil signals not only an increased supply, but an unexpected weakening demand worldwide. Demand grows economies despite the lie Arthur Laffer has advanced for the last 35 years with the perpetuation and expansion of trickle down Reagonomics with every President, Democrats included, since 1981.
The problem world economies face today is the destruction of the American consumer class. While Europe and Asia consumed American made products during their long rebuilding and recovery process following World War II from the late 1940s straight through to the early 1970s, the consumer economy that the American Middle Class built during that same period, and the consumer culture that has been maintained in America, largely through deficit financing as wage growth has stagnated since 1979 has run its course. The American consumer is over leveraged and has no extra income to continue the over consumption that has been the hallmark of the American economy. This consumer culture allowed both Germany and Japan to rebuild after the war, and since the 1980s it has allowed the Chinese economy to grow at a nearly unprecedented pace.
The acceleration of Chinese economic growth that followed the Clinton Administration granting Permanent Most Favored Nation Trading Partner status to the People’s Republic of China and their membership in the World Trade Organization has been fueled almost exclusively by the American consumer’s ability to continue to leverage the value of their real estate along with easy access to consumer or student debt. While the majority of student debt has financed tuition payments, book purchases, housing, and food costs, a small portion of student debt, and a large portion of the consumer credit card debt that most American college students graduate with has continued the consumer culture in the United States.
With fully 50% fifty percent of US student loan borrowers in default, representing nearly a quarter of all Millennials the American consumer economy is reaching its end. In 1996, American homeowners had mortgage debt totaling $2.5 Trillion. Today US mortgage debt is valued at $12.5 Trillion. In 1996, US Student Loan debt was valued at approximately $150 Billion, and today it is valued at approximately $1.5 Trillion. In 1996, as a percentage of household debt, consumer credit card debt peaked in the United States. While as a percentage it has remained a smaller part of US Household debt burden, it is approximately $900 Billion today. In 2003, US consumers owed approximately $600 Billion in Auto Loan Debt. Today Americans owe more than $1 Trillion in Auto Loan Debt. This means that Americans owe nearly $16 Trillion in Household debt today.
In 1996, the US GDP was valued at $8.1 Trillion, and in 2015, US GDP was valued at approximately $17 Trillion. In 1996, US Household debt was approximately 50% fifty percent of US GDP. Today US Household debt is approximately 94% ninety-four percent of US GDP.
In 2000, the federal government’s total national debt was valued at approximately $6 Trillion, and was projected to fall. Despite claims by both Republican members of Congress and the Clinton Administration that the government ran a surplus during the late 1990s, GAO numbers show that while the government approached a balanced budget in the late 1990s, the debt continued to grow as a very small deficit remained. In 2000, the US GDP was valued at $10.28 Trillion, which meant that the National Debt was approximately 60% of US GDP. Today the US National Debt is over $19 Trillion, which means that it is more than 110% of US GDP.
The majority of European nations also currently face heavy national debt burdens. Most economists agree that the Federal Reserve Board and the International Monetary Fund are presently over-leveraged as well, which means that world governments and the lenders of last resort are all broke. The economic leverage propping up the world economy so greatly exceeds the leverage in the world economy in 1929 that it is impossible to calculate the impact a crack in the armor to the US Dollar as a reserve currency will have on the world economy.
In 2008 and early 2009 as TARP and the Auto Industry Bailout were put in place to stop the bleeding caused by over leverage a handful of people argued for allowing a collapse and a readjusting of inflated values. Because of both the federal government bailout and the quiet multi-Trillion dollar behind the scenes bailout of the banks by the Federal Reserve Bank, the stock market, and the real estate market were the only areas of the economy to see any sustained deflationary pressure. Even that limited deflationary pressure was short lived. By April 2009, stock prices had bottomed, and the stock market for most of the last 7 years has enjoyed a slow, but steady Bull Run. During this same period housing prices recovered slowly as borrower’s access to capital remained limited for new home purchases, but in many markets today prices are up significantly.
But this is not true everywhere in the United States, and it is not true in many communities because the underlying economy has remained anemic. More than 50,000 factories in the United States have closed since the year 2000, and while manufacturing has scene some job growth during the Obama Administration, the new jobs do not replace those lost by the factory closings. Where there has been job growth in the United States since 2008, it has been primarily in the health care field as a new infusion of cash has helped the industry with the Affordable Care Act, or it has been focused more steadily on low income service industry jobs. Chain restaurants and big box retailers continue to expand in the United States, but even the Big Box retailers have begun to slow their growth.
Why Walmart Shuttering 300 Stores and Low Oil Prices are Bad Signs
The lack of consumer demand for their wares has caused Walmart, the king of the big box stores to order the shuttering of almost 300 stores this year. Kmart, and Sears have raced to close stores around the United States to maintain profitability. The Borders Bookstore chain went bankrupt in the early part of the decade and closed its doors for good. Yes, even the American Big Box retailer, the last bastion of job creation in the American economy has begun to peter out, and with their slow demise, the Chinese economy has suffered.
The Chinese economy has failed because of a problem that has existed in the United States for some time. Overcapacity! 50% of the Chinese GDP has been the result of investment in new housing, new factories, new commercial real estate, and new infrastructure over the last two decades. The hope for this investment was the creation of a thriving industrial consumer economy for China, unfortunately, that investment was made because of a false premise, the continued existence of the US consumer culture. China has built brand new metropolises with fantastic skyscrapers and stunning industrial buildings that are completely empty. While the American West gave the world Ghost Towns, China has given the world Ghost Cities. Unlike the one time American boom towns that folded after the mining strike went bust, these Chinese ghost cities have never been occupied.
As American consumer demand has waned, China’s overcapacity has not been able to build new consumer demand internally to utilize its excess capacity. Because of this reality the Chinese stock market has not been a friendly place for investors during the past year. The global rich are trying their best to maintain the facade, but the cracks in the system are showing the strains caused by the consolidation of productivity gains in the hands of the wealthy in the United States since 1979. In 1980, US Household debt represented 47% of US GDP and consumed 68% of US disposable income. In 2007, it consumed 127% of US disposable income, and remains in excess of 100% of US disposable income today. The American consumer is completely tapped out.
US Middle Class income workers in 1979 had almost $20,000 more in real purchasing power than they have today. This occurred because while US productivity growth was substantial, the vast majority of the benefits of that growth accrued to the richest 1/10th of 1 percent of Americans. Between the end of World War II and 1979, that was not the case. During that period, most of the gains from US productivity growth were shared fairly consistently across the economic spectrum.
Storm Warnings
In July of 2007, there was a single bad day during what had been a very long Bull Run for Wall Street. I don’t recall the specific piece of news that Jim Cramer reported on his Mad Money show that July day when the first cracks in the armor started to show, but I do recall the conversation I had with my father’s cousin about the coming economic collapse because of that piece of news. My father’s cousin had worked in the executive suite of a Fortune 50 company as part of the accounting division, but also as an IT systems manager. During the 1980s he was one of the few people who understood enough about both accounting and computers to handle some very high level work. He would go on to be the number 3 employee at a computer security firm that has essentially been a leader in making sure banks aren’t hacked.
He was also a good student of his father who had headed to California in the late 1950s with a broken down car, a family, and $50 in his pocket. His father died in 2001 with an estate valued at more than $7 million because of his successful real estate and stock investments. By October of 2007 when the market peaked, our convictions about the looming collapse were so certain that we both agreed it would be a good idea to tell my mother to pull her retirement funds out of the stock market and invest in bonds. While her co-workers saw their retirement savings destroyed over the next two years, my mother saw her retirement account grow slightly and remain intact just as she retired in 2011. We actually had her begin moving a small part of her money back into stocks in April of 2009 when the market bottomed.
I tell you all of this because in discussing how mahogany row as my father’s cousin always called the corporate executives and Wall Streeters who run the world economy look at the world, everything is an opportunity. Whether the market goes up, goes down, or moves sideways, they make money. When everyone else was losing a fortune, Wall Street was shorting Lehman Brothers and AIG. When Tarp failed to pass the first time, they covered their short bets, took a nice profit, and laughed when Tarp passed the second time, just as they wanted it to do. Remember, the first rule of Wall Street is rig the game in your favor, then screw over the little guys a bit more.
The BuyBack Problem
While the real economy has shown anemic growth and wage growth has remained imaginary in the US economy, Wall Street has enjoyed a seven year Bull Run with stocks moving ever higher since April 2009 when they bottomed. The reason that the stock market has enjoyed a strong Bull Run has nothing to do with the American investor having confidence in this market. It has nothing to do with workers putting more money into their retirement accounts to make up for shortfalls, and it has nothing to do with real economic growth.
The reason that the US stock market has continued to see its prices climb is because the game is rigged in favor of corporate executives who receive a majority of their compensation in the form of stock options. In the past when a company turned a profit, it would build a new factory to meet increased demand, thereby driving new demand as more people became employed, but that is not how American companies do business anymore.
While Walmart shuttering stores is a warning sign, as is the closure of several corporate owned McDonald’s locations because they are early indicators of a lack of consumer demand in the US economy that has not existed in the past, a more troubling warning sign has been the inability of corporate executives to continue to prop up stock prices. In the past, companies grew their stock price by reinvesting in the business, growing the consumer base with the new jobs they created, and increasing demand for their products through that reinvestment. When companies couldn’t grow their bottom line by expanding their own operations because there was no likely increase in demand for their products, they grew their bottom line through mergers and acquisitions. They would buy out rival companies or companies in related industries, or new market areas that they wanted to target. To some degree, mergers and acquisitions remain a part of business growth strategy today, but a new method to inflate stock prices has become the norm. Traditional growth investing no longer exists in corporate America because of the executive stock option.
Members of the Board of Directors, and CEOs of most publicly traded companies in America have a new tool to increase stock price almost on demand, and grow the value of their stock options. That tool is the stock buyback. In the past companies on occasion would repurchase their own stock when they had excess capital and there were no obvious areas of investment. This made shareholders happy because the stock price went up, and it showed confidence in the company’s ability to compete and grow.
To a certain extent that remains true today as well, but primarily stock buybacks on the part of publicly traded companies are an effort to pad the salaries of corporate executives and members of the board of directors. When compensation is tied to stock options for these people, a stock buyback by the company typically raises the stock price as a smaller float remains available on the public markets because of the buyback. This smaller float means any market demand for the stock drives the stock price higher. For most of the last seven years while corporate America has made very few investments in new capacity. It has more often been the case that American facilities are shuttered, like the Carrier facility in Indianapolis, in favor of new facilities in low wage countries such as Mexico, despite billions of dollars in profits for parent company United Technologies. These lower wage workers cannot replace the consumer demand that their American counterparts created.
Of course the bigger problem is the looming debt crisis. With Americans already spending more than 100% of their disposable income to pay for Household debt, there is no money left to pay for new consumer goods, and there is no money left to pay for the debts. Each factory shipped to a low wage country eliminates an ever larger piece of consumer demand for the world economy because US workers were the most consumer oriented in the world.
What Does This Have to Do With the “Powers that Be?”
Again, if you have been paying attention to economics and politics, at least as they exist in the United States, it should by now be perfectly obvious to you that the same handful of individuals who spend the majority on US political campaigns -just 195 Americans investing $650 million in the 2014 Congressional races, exert considerable influence on Wall Street. These uber rich investors understand the economic fundamentals that I have explained to you quite well. They understand them well enough that you will probably see a quick spike in stock prices, just before the stock market craters.
Remember how I told you that in July of 2007 I thought things were going to crash. There was another little Bull Run between July 2007 and October of 2007 when the stock market peaked. The uber wealthy knew it was coming too. A few days of peak numbers meant that the powers that be were driving everything to new heights just before they started their planned retreat. The powers that be had the vast majority of their money out of the stock market by the time Bear Sterns imploded in early 2008, and they were earning considerable profits by short selling Lehman Brothers.
Despite reports that there has been a “deleveraging” in the economy over the past several years, that is not what has occurred. What has really happened, is that a large portion of the American middle class went bankrupt, and/or became the new American poor and underclass. Those same Wall Street hedge funds and banks that caused the last collapse used leverage to repurchase much cheaper real estate and rather than package mortgages, they have now packaged bundles of expected rents as their new Collateralized Debt Obligations. They have bought apartments and houses as rental properties with borrowed money, and securitized those investments and sold them to the pension funds. They have once again taken out insurance bets against their new CDOs and are ready for the next great collapse. This time, they will make a killing if it all goes under.
How Does This Mean They Have Won the Next Election Regardless of the Nominee?
As the field of candidates remains presently, Donald Trump is the most likely Republican nominee. He is a candidate whose success and creation is entirely the fault of the mainstream media, that those same powers that be own and control. Nothing is reported by the major corporate media that the powers that be do not want reported. They have reported almost exclusively about Mr. Trump while ignoring all other candidates. If you haven’t read Noam Chomsky’s “Manufacturing Consent,” you might want to read it.
The only other remaining Republican candidates are Ted Cruz and Marco Rubio, both originally Tea Party candidates, despite Rubio having distanced himself it is part of his biography. While John Kasich is still in the race, his chance of winning any contests going forward are slim. The Nevada caucus would seem to show the Republican Party is coalescing around the Trump candidacy as his vote percentage has increased and he seems to be consolidating the Jeb Bush voters. If Trump, Rubio, or Cruz win, mainstream rock rib Republicans lose, and the traditional business friendly Republican Party will bear no responsibility for the looming economic collapse which the powers that be are working hard to push into 2017.
The Tea Party is as anti-Wall Street and corporate America as Occupy Wall Street. Unfortunately, the Tea Party also represents the uneducated, and undereducated part of the American electorate that doesn’t understand enough about economics to vote for people who will fix the economy. The Tea Party includes the brain washed masses who believe tax cuts are the answer to every economic problem. The Tea Party is monster that corporate media created. As luck would have it, the uneducated, and undereducated also happens to be the part of the electorate that is the most overtly racist and afraid of “others.” The undereducated part of the populace is the most reactionary. The fact that Trump does not see the looming collapse and isn’t talking about it, speaks volumes about his lack of economic understanding or prowess. Especially since talking about the rigged game would win him more Tea Party votes.
The powers that be want traditional rock rib Republicans who vote the Chamber of Commerce line on every bill to control the House, Senate, and the Presidency. If the economy fails on the watch of a Tea Partier, or a radical outsider like Trump, then the pro-business Republican Party will emerge from the collapse much stronger. The powers that be have been afraid of the uneducated in their party since they elected a class of House members who were ready to let the world economy collapse rather than raise the debt ceiling because they didn’t understand anything about economics. The powers that be are as concerned about the stupid people in the Republican party as they are concerned about the “socialists” on the Democratic side, if not more so.
Why Would the Powers That Be Want the Collapse to Come in 2017?
President Obama’s policies in 2009, and the policies he supported as a candidate in the fall of 2008 saved the power’s that be’s bacon. The wheels had fallen off the economy and he protected them as much if not more than any other member of the political establishment. President Obama is Wall Street’s savior. They do not want any of the blame for the collapse to fall on his shoulders. In fact, they know that if the Tea Party had made the infrastructure investments that Obama was urging, the world economy would probably be fairing better today because American consumers would have been able to continue propping up the Chinese economy for a few more years.
What About Bernie and Hillary? Why Wouldn’t the Powers that Be Care if they won?
Quite frankly, there is a small portion of the powers that be who are reading the tea leaves, and thinking Bernie might be the answer. They could never admit it, but it might even be part of the reason that their Super Pac’s are running so called “Todd Aiken” type attack ads a la Claire McCaskill, not because they think he is the weaker candidate, but because they don’t know if he might not just be what they need to save their bacon one more time. There is a portion of the powers that be who are looking back at history and thanking their lucky stars that FDR welcomed their hatred. Don’t get me wrong, I think that the portion of the powers that be who think Bernie might just be what they need to save them is minuscule, but Nick Hanauer isn’t the only member of the one percent who is afraid of pitch forks and guillotines. It is likely that a larger portion of the powers that be, the masters of the universe who run the world economy are indifferent to the Sanders candidacy because they are certain that the collapse will happen sometime in the fall of 2017, if they can push it out long enough. They will continue their stock buybacks, and cheerful reporting of any minuscule job growth as a positive sign as long as they can report it.
If the economy collapse on Bernie’s watch, they will move to consolidate power even further, and effectively work to kill populist movements for at least a couple of generations. The corporate media will blame “populist economics” and repeat the lie over and over again the populist economics is a failure and “socialism” is a failure. That will be the mantra for four years. If Secretary Clinton wins, the corporate media will be able to blame the Democrats, and more importantly, they will be able to make a case for a sensible main stream pro-business Republican like a John Kasich as the nominee of their party in 2020. A steady old hand like Kasich will be a much easier sell in a deflationary environment if the economy collapses on Clinton’s watch. They will blame it on her further leftist policies because Bernie moved the party left. Secretary Clinton becoming President is a double victory for the powers that be as far as they are concerned.
What are the Powers that Be Missing?
If there is one major blind spot amongst the powers that be as the masters of the universe it is the fact that they have been untouchable their entire lives. They are too big to fail. They are too big to jail, and they have been too powerful to be questioned the majority of their lives. They believe they are infallible. With exceptions for the small portion of the one percent who see the world like Nick Hanauer, who would welcome a correction in our political zeitgeist to the left and a return of the demand based economy, most of the one percent have bought into the Laffer curve and the voodoo economics it brought with it in the form of “trickle down.”
Sanders’ plan to invest in infrastructure, dramatically raise the minimum wage, provide an affordable education to Millennials and the members of Generation 9/11 who will soon be following them to college, while taking the burden of providing for health care off the backs of American business and reigning in those exorbitant costs probably aren’t enough to build a speedy recovery from the coming collapse. There is no policy that could be implemented which will stop the collapse.
It is a matter of demographics right now. One of the reasons the 2008 collapse happened is also a matter of demographics. 2008 was 62 years after the start of the Baby Boom. It was the first year that Baby Boomers could begin to retire and draw Social Security checks. It was the year that the first of the Baby Boomers started to withdraw funds from their retirement accounts.
Most of those Boomers have kept most of their money in the market and continued working in an effort to rebuild the retirement nest egg that was destroyed by the Great Recession, but this year 2016 marks another demographic milestone for the Baby Boomers. The Boomers born in 1946, the first year of the Baby Boom are turning 70 years old. By law, those Boomers are required to begin withdrawing some of their money from their 401(k)s, 403(b)s and IRAs. If they don’t withdraw some of their money they will face tax penalties. A lot of those people won’t know that until next spring when they talk with their tax preparers. Some will get that advice this year and begin taking small withdrawals of funds, but 2017 will be the year of the second exodus.
As more money leaves the market, the corporate buybacks by insiders won’t be able to hide the anemia anymore. Other members of the Baby Boom who start to see their nest eggs shrink again will pull their money from the market to protect whatever they have left. They can’t take another 2008. They won’t survive it. If they don’t pull all of their money out they will have none left. There will be a panic and the panic will get worse as the executives see their stock options fall under water. There will be blood in the streets as the insiders start to take short positions and buy puts to protect their interests. When the stock market falls, the weakness in the real economy will no longer be able to be hidden.
While Walmart is shuttering a few hundred stores this year, and McDonald’s is closing stores, next year cuts will happen to stop the bleeding. Consumer confidence and consumer spending will be completely eradicated as the market craters next year. With no consumer left, business will dry up. Deflation will hit everything, not just stocks and real estate in 2017. For the first time since the 1930s, the world economy will know what an economy is steep decline looks like and it won’t be pretty. It is unavoidable at this point. There was a brief period in the early 2010s when it could have been prevented if enough manufacturing returned to the United States, but that didn’t happen, and we are in for a decade or more that will make the last decade feel like good times.
The Powers That Be Think It Won’t Effect Them
At the end of the day, corporate executives and Wall Streeters who grew up in the age of the golden parachute don’t understand what a real economic collapse looks like. They almost faced one in 2008 and were bailed out. Rather than fix their internal problems that caused the underlying economic weakness, they continued on the same course they have always traveled. A Sanders’ Presidency might alleviate some of the pain they are going to feel, but no government and no bank of last resort will be able to bail them out this time. The consumers who would fuel the recover are completely tapped out. The average American has household debts that exceed their disposable income. There is no consumer left to create demand. That is the whole ball of wax. At the end of the day, a lot of people will be filing bankruptcy in the next several years, and with jobs becoming more scarce, wage growth isn’t likely to be around the corner.
With the government saddled with more than 110% of GDP in debt, it won’t be able to borrow enough to fund the kind of infrastructure investments needed to stimulate the economy as happened even under Reagan in the form of military investments. With the rich losing money, there won’t be tax revenue to fund the path out of this mess either. As the old phrase goes, chickens are coming home to roost.