Oct 122020
 


Edward Hopper The barber shop 1931

 

 

How their beloved neighbors see America, a comment by Automatic Earth commenter ByronBishop. I don’t think I need to add much. Took the title from a comment on the comment.

 

 

ByronBishop: I live in rural Canada and I do not have television, so my information on the American presidential election comes from newspapers and some online blogs. But what impresses me the most in this cycle is what good theatre it is!

It is my view that the choice for American voters is simply this: which collection of billionaires will run the country? The Democrats or Republicans? At root, their policies are not very different; their principal goal is to maintain and extend their privilege, and to continue to develop the legal and fiscal framework that supports their activities. This framework consists of, among other things, the following policies, and most crucially, broad public acceptance of the righteousness of these policies:

• To maintain very low taxes on income and capital gains, favourable treatment of dividend and interest income, and no inheritance tax

• In the financial manipulation field, improve public and regulatory acceptance of the attitude usefully articulated by JH Kuntsler as “nothing matters and anything goes”. This allows (among many other things) private equity firms to buy up useful and productive enterprises, strip out all the assets in fees and special dividends and through the sale of high-yield (and chancy) bonds, and to then release the debt-ridden hulk back into the marketplace to sink (mostly) or swim (rarely). Also supports share buybacks, collateralised debt instruments, relocation of factories to low-wage states and countries.

• Keep the American military actively working around the world, preferably using expensive armaments. Where possible avoid stationing troops in warzones as casualties provoke bad publicity. Promote demand for novel and very expensive war materiel. (Smart bombs and drones sell to government on a cost-plus basis.)

• Support the National Rifle Association, which is in fact an association of arms manufacturers and merchants with a noisy public relations arm consisting of private members defending their Second Amendment rights. Until forty years ago the Second Amendment right was the right to join a well-regulated militia, but now it is the right to have many expensive weapons in your house.

• Everyone must recognise that public healthcare is un-American. It is a moral issue: if you cannot afford healthcare you do not deserve it. Some of the highest paid executive teams in the US are in the healthcare field, while executive teams in Canadian and European countries are mostly paid on a civil service scale. Shareholders in American healthcare companies become very rich. Were healthcare to become nationalised like in Canada and most European nations, most of the private profit would be lost

• Large corporations must be permitted to manipulate share prices through buybacks and curious business practices (Boeing, the airlines), but must then be protected by bailouts if their business falters.

• The financialisation of the economy must be regulated as lightly as possible so that fees can continue to flow.

• Regulatory capture must be celebrated (under a different name). The two-way flow of personnel from regulated industries to regulatory government departments ensures that little impedes business development.

• To ensure that the courts at all levels are staffed with conservative, business-friendly judges.

• To ensure that environmental protection regulations do not unduly interfere with business operations

I do not for a moment think that the billionaires and multi-millionaires conspire to run the American system. They are not a cabal; they do not meet. Rather, theirs is an emergent system: many individuals working towards their own goals will thus help others pursuing their own goals. It is like a flock of shorebirds wheeling and swooping in perfect unison; they are not directed, but they are simply responding to the actions of their neighbouring birds.

The billionaires achieve this through owning mainstream media companies, funding think tanks and policy research institutes, and supporting lobbyist groups and public relations shills. And they have been astonished , I am sure, to discover how cheaply they can buy the support of members of Congress. Chump-change donations to campaign funding pays off in spades. Lobbyists have language ready to drop in to any bill, to achieve corporate aims. That’s how emergency support of American workers became bailouts for cruise companies, who are based offshore and pay few American taxes.

And then members of Congress have to be made part of the investing class. For example, a fabulous oil & gas play is spun off into a Special Purpose Vehicle whose success is assured, and select politicians are invited to invest in it. If they cannot afford to purchase shares a private loan is arranged and documented and subsequently repaid, all above board. The company is spectacularly successful and the “investors” score big-time and repay any loans. Didn’t George W Bush succeed in an investment in professional sports in Texas, in a similar way? And by the way, how did Senate Majority Leader McConnell amass a self-declared net worth of $10 million after a lifetime of working as a civil servant at $200k per year?

All of the rest is theatre. In this election cycle the hot-button issues are access to abortion (again), racism and social justice (again), overseas wars, China as an economic threat, Russia! Russia! Russia!, voting systems and practices, and the age and personalities of the presidential candidates. All theatre. The billionaires don’t care about any of these things, as almost none of these things personally affect them. Safe and discreet abortion is always available somewhere in the world where private jets fly. Billionaires do not ever see people of different colour or status or class unless they choose to, and then only in circumstances they control. Russia and China are opportunities, not threats. And the presidential candidates can be influenced very cheaply. A Nevada casino magnate had the American embassy moved from Tel Aviv to Jerusalem for only $25 million in campaign donations to a notoriously cheap candidate.

The one thing that most amazes me is how the billionaires can continue to convince people to vote against their own best interests, whether economic interest, social interest or even national interest. At one time they used “race” quite openly, appealing to feelings of racial superiority or to fears of being electorally overwhelmed by “those people”, whether black or brown or oriental or poor. When openly racist campaigning became no longer acceptable, some genius concluded that “abortion” would make an excellent substitute, as it can combine all of the race and class issues and can bring in all of the family values baggage as well. Few other issues can motivate such a wide cross-section of the American public, and it can motivate people on either side of the issue. With so much focus on abortion who has time to worry about the domination of government by corporate interests?

Many commentators focus on the gross inequality of incomes and wealth in the USA, and a recent report by the Rand Corporation brings this in to clear focus. They analysed the growth in incomes across the entire working population of the USA for the period from the end of World War II to the present, and they found that up until 1975 or so the increase in general prosperity in the nation was shared equally across all income groups. Starting in the mid-1970’s however, most of the increase in prosperity was arrogated by the top income earners, so that the rich got richer and no-one else shared in the good times. The astonishing figure that the Rand researchers came up with was that the top 1% has actually taken all of the $50 trillion dollars in new wealth from everyone else in the 45 year period to 2020. There is a reason why so many people feel that the American Dream has passed them by – it’s because it actually has.

The usual remedy for this sort of gross inequality of power and wealth in society is revolution. The French Revolution comes to mind, but also the Russian Revolution. I wonder what was the root cause of the great social and political upheavals in Europe in 1848? (I can’t remember.) A less frequent remedy is the rise of a genuine populist movement, one that can actually re-distribute power (and thus wealth and opportunity). As Gwnne Dyer usefully says: populism is not an ideology, it is a technique. In America, I suspect that a true populist leader could only arise at the state level, and then from outside the two main parties.

If the current polarisation in American politics continues, the states may become the primary protector of social values (progressive or conservative) and the regulations that flow from them (access to abortion, gun rights and restrictions, access to health care, role of religion in public life, etc), and it may be that a true populist, charismatic leader can emerge and accrue the political power and authenticity to restrict the ability of the elites to organise state society. And that might spread, state by state. We outsiders can only hope that our fellow citizens in the USA can get their sh!t together at some point. Watching civil unrest unfold is no fun – I have cousins in America.

 

 

 

We try to run the Automatic Earth on donations. Since ad revenue has collapsed, you are now not just a reader, but an integral part of the process that builds this site.

Click at the top of the sidebars for Paypal and Patreon donations. Thank you for your support.

 

 

Support the Automatic Earth in virustime, election time, all the time. Click at the top of the sidebars for Paypal and Patreon.

 

Aug 262015
 
 August 26, 2015  Posted by at 9:23 am Finance Tagged with: , , , , , , ,  8 Responses »


Russell Lee Hollywood, California. Used car lot. 1942

Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.

A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.

China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.

That is a bursting bubble. Not terribly unique or mind-blowing, bubbles always burst. However, in this instance, the entire world will be swept out to sea with it. More money-printing, even if Beijing would attempt it, no longer does any good, because the Politburo and central bank aura’s of infallibility and omnipotence have been pierced and debunked. Yesterday’s cuts in interest rates and reserve requirement ratios (RRR) are equally useless, if not worse, if only because while they may provide a short term additional illusion, they also spell loud and clear that the leadership admits its previous measures have been failures. Emperor perhaps, but no clothes.

Every additional measure after this, and there will be many, will take off more of the power veneer Xi and Li have been ‘decorated’ with. Zero Hedge last night quoted SocGen on the precisely this topic: how Beijing painted itself into a corner on the RRR issue, while simultaneously spending fortunes in foreign reserves.

The Most Surprising Thing About China’s RRR Cut

[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.

Ambrose Evans-Pritchard, too, touches on the subject of China’s free-falling foreign reserves.

China Cuts Rates To Stem Crisis, But Doubts Grow On Foreign Reserve Buffer

The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run.

If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.

“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.

It is a dangerous game they play, that much should be clear. And you know what China bought those foreign reserves with in the first place? With freshly printed monopoly money. Which is the same source from which the Vinny the Kneecapper shadow loans originated that every second grandma signed up to in order to purchase ghost apartments and shares of unproductive companies.

And that leads to another issue I’ve touched upon countless times: I can’t see how China can NOT descend into severe civil unrest. The government at present attempts to hide its impotence and failures behind the arrest of all sorts of scapegoats, but Xi and Li themselves should, and probably will, be accused at some point. They’ve gambled away a lot of what made their country function, albeit not at American or European wealth levels.

If the Communist Party had opted for what is sometimes labeled ‘organic’ growth (I’m not a big afficionado of the term), instead of ‘miracle’ Ponzi ‘growth’, if they had not to such a huge extent relied on Vinny the Kneecapper to provide the credit that made everything ‘grow’ so miraculously, their country would not be in such a bind. It would not have to deleverage at the same blinding speed it ostensibly grew at since 2008 (at the latest).

There are still voices talking about the ‘logical’ aim of Beijing to switch its economy from one that is export driven to one in which the Chinese consumer herself is the engine of growth. Well, that dream, too, has now been found out to be made of shards of shattered glass. The idea of a change towards a domestic consumption-driven economy is being revealed as a woeful disaster.

And that has always been predictable; you can’t magically turn into a consumer-based economy by blowing bubbles first in property and then in stocks, and hope people’s profits in both will make them spend. Because the whole endeavor was based from the get-go on huge increases in debt, the just as predictable outcome is, and will be even much more, that people count their losses and spend much less in the local economy. While those with remaining spending power purchase property in the US, Britain, Australia. And go live there too, where they feel safe(r).

I fear for the Chinese citizen. Not so much for Xi and Li. They will get what they deserve.