Tag Archives: Financialization

The Global Financial End-Game, by Charles Hugh Smith

Posted on March 7, 2021 | Leave a comment

It’s going to end badly, and here’s a blow-by-blow from Charles Hugh Smith at oftwominds.com:

The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

For those seeking a summary, here is the global financial endgame in fourteen points:

1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

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How “Wealthy” Would We Be If We Stopped Borrowing Trillions Every Year? by Charles Hugh Smith

Posted on August 24, 2018 | Leave a comment

Charles Hugh Smith asks the trillion dollar question. From Smith at oftwominds.com:

These charts reflect a linear system that is wobbling into the first stages of non-linear destabilization.
The widespread presumption is the U.S. is wealthy beyond words, and will remain so as far as the eye can see: wealthy enough to fund trillion-dollar weapons systems, trillion-dollar endless wars, multi-trillion dollar Medicare for all, multi-trillion dollar Universal Basic Income, and so on, in an endless profusion of endless trillions.
Just as a thought experiment, let’s ask: how “wealthy” would we be if we stopped borrowing trillions of dollars every year? Or put another way, how “wealthy” would we be if the rest of the world stops buying our trillions in newly issued bonds, mortgages, auto loans, etc.?
The verboten reality is our “wealth” is nothing but a sand castle of debt. Take away more borrowing and the castle melts away. I’ve gathered a selection of charts that show just how dependent we are on massive debt expansion that continues essentially forever, as any pause in debt expansion will collapse the entire system.
Corporate buybacks have powered rising corporate earnings–and the buybacks are funded by debt. Corporate debt has exploded higher in the past decade, enabling stock buybacks on an unprecedented scale.
Government debt–federal, state and local– is rising an exponential rates.We’re not paying for more government programs with earnings–we’re simply borrowing trillions and hoping we can borrow the interest payments that will also rise along with the debt.
Household debt, student loans, auto loans–all are soaring. The corporate sector, government and the household sector–all are living on borrowed money, and relying on magical thinking to mask the inevitable consequences.
Here’s debt to GDP. Yes, the economy expanded, but debt expanded much faster. Every additional dollar of GDP now requires multiple dollars of new debt.

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When Long-Brewing Instability Finally Reaches Crisis, by Charles Hugh Smith

Posted on July 25, 2018 | Leave a comment

Generally crises that come “out of the blue” have very long roots. From Charles Hugh Smith at oftwominds.com:

Keep an eye on the system’s buffers. They look fine until they suddenly collapse.
The doom-and-gloomers among us who have been predicting the unraveling of an inherently unstable financial system appear to have been disproved by the reflation of yet another credit-asset bubble. But inherently unstable / imbalanced systems can stumble onward for years or even decades, making fools of all who warn of an eventual reset.
Destabilizing systems can cling on for decades, as the inevitable crisis doesn’t necessarily resolve the instability. History shows that when systems had enough inherent wealth to draw upon, they could survive for centuries, thinning their resources, adaptability and buffers until their reservoirs were finally drained. Until then, they simply did more of what’s failed to maintain the sclerotic, self-serving elites at the top of the Imperial food chain.
If we want to trace back the systemic instabilities and imbalances that culminated in China’s revolution in 1949, we can start in 1900 with the Boxer Rebellion, which was itself a reaction to the Opium Wars of the 1840s that established Western influence and control in China.
But is this far enough back in time to understand the Communist Revolution in the 1940s? If we want a comprehensive understanding, we must go back to 1644 and the demise of the Ming Empire, and perhaps even farther back to the Mongol victory over the Song dynasties in the late 1200s.
In the same fashion, we can trace the current crisis of global-finance Capitalism back to the expansion of globalization, affordable fossil fuels and credit in the early 1900s. Affordable fossil fuels enabled rapid industrialization and the growth of transportation and communication networks. Add the expansionary effects of globalization and credit, and the consumer-finance economy took off like a rocket until the inevitable consequences of providing leverage and credit to marginal producers, buyers and speculators led to the Great Depression.
And so here we are in 2018, 25 years into an unprecedented technological and financial boom which is once again the result of cheap, abundant energy and credit and the global arbitrage of labor, yields, currencies and risk. And once again, the “solution” to every crisis is to do more of what’s failed because that’s the only option that doesn’t require sacrifices from the elites and a painful reshuffling of power relations.

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The Gathering Storm, by Charles Hugh Smith

Posted on July 4, 2018 | Leave a comment

The only way you can’t see the storm clouds on the horizon is not to look. From Charles Hugh Smith at oftwominds.com:

The gathering storm cannot be dissipated with propaganda and bribes.
July 4th is an appropriate day to borrow Winston Churchill’s the gathering storm to describe the existential crisis that will envelope America within the next decade. There is no single cause of the gathering storm; in complex systems, dynamics feed back into one another, and the sum of destabilizing disorder is greater than a simple sum of its parts.
Causal factors can be roughly broken into two categories: systemic and social/economic. The central illusion of those who focus solely on social, political and economic issues as the sources of destabilization is that tweaking the parameters of the status quo is all that’s needed to right the ship: if only Trump were impeached, if only GDP hits 4% annual growth rate, if only the Federal Reserve started controlling the price of bat guano, etc., etc., etc.
The unwelcome reality is the systemic issues cannot be reversed with policy tweaks or shuffling those at the top of a crumbling centralized order. The systemic problems arise from the structures of centralization and monopoly capital, the institutionalization of perverse incentives and the depletion of natural capital: soil, water, fossil fuels, etc.
We can create “money” out of thin air but we can’t print fresh water, productive soil or affordable energy out of thin air.
Regardless of their ideological labels, centralized socio-economic systems follow an S-Curve of rapid expansion during a “boost phase,” a period of stable expansion (maturity) and then a period of stagnation and decline as the system’s participants do more of what’s failed, as they cannot accept that what worked so well in the past no longer works.
A successful model traps those within it; escape becomes impossible. That’s the lesson of the S-Curve:
The Ratchet Effect is another key reason why meaningful reform of the status quo is impossible. In flush times, budgets expand as easily as waistlines, ratcheting up to consume ever-higher revenues. But once revenues start declining, the administrative/consumerist status quo is fiercely resistant to any reduction.
Like a body which has grown fat from excessive consumption and a decline in vitality/ functionality, the status quo resists any reduction in staffing or spending, sacrificing muscle to keep its layers of fat untouched.
To continue reading: The Gathering Storm

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Things To Come, by James Howard Kunstler

Posted on June 12, 2017 | Leave a comment

As exciting as Russia and Donald Trump and whatnot may be, it’s small change compared to the looming debt catastrophe. From James Howard Kunstler at kunstler.com:

As our politicos creep deeper into a legalistic wilderness hunting for phantoms of Russian collusion, nobody pays attention to the most dangerous force in American life: the unraveling financialization of the economy.

Financialization is what happens when the people-in-charge “create” colossal sums of “money” out of nothing — by issuing loans, a.k.a. debt — and then cream off stupendous profits from the asset bubbles, interest rate arbitrages, and other opportunities for swindling that the artificial wealth presents. It was a kind of magic trick that produced monuments of concentrated personal wealth for a few and left the rest of the population drowning in obligations from a stolen future. The future is now upon us.

Financialization expressed itself in other interesting ways, for instance the amazing renovation of New York City (Brooklyn especially). It didn’t happen just because Generation X was repulsed by the boring suburbs it grew up in and longed for a life of artisanal cocktails. It happened because financialization concentrated immense wealth geographically in the very few places where its activities took place — not just New York but San Francisco, Washington, and Boston — and could support luxuries like craft food and brews.

Quite a bit of that wealth was extracted from asset-stripping the rest of America where financialization was absent, kind of a national distress sale of the fly-over places and the people in them. That dynamic, of course, produced the phenomenon of President Donald Trump, the distilled essence of all the economic distress “out there” and the rage it entailed. The people of Ohio, Indiana, and Wisconsin were left holding a big bag of nothing and they certainly noticed what had been done to them, though they had no idea what to do about it, except maybe try to escape the moment-by-moment pain of their ruined lives with powerful drugs.

To continue reading: Things To Come

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We’re in the Eye of a Global Financial Hurricane, by Charles Hugh Smith

Posted on May 23, 2016 | 1 comment

You can buy growth with debt for awhile, but then you have to pay it back. From Charles Hugh Smith at oftwominds.com:

The only “growth” we’re experiencing are the financial cancers of systemic risk and financialization’s soaring wealth/income inequality.

The Keynesian gods have failed, and as a result we’re in the eye of a global financial hurricane.

The Keynesian god of growth has failed.

The Keynesian god of borrowing from the future to fund today’s consumption has failed.

The Keynesian god of monetary stimulus / financialization has failed.

Every major central bank and state worships these Keynesian idols:

1. Growth. (Never mind the cost or what kind of growth–all growth is good, even the financial equivalent of aggressive cancer).

2. Borrowing from the future to fund today’s keg party, worthless college diploma, particle board bookcase, stock buy-back, etc. (oops, I mean “investment”)–a.k.a.deficit spending which is a polite way of saying this unsavory truth: stealing from our children and grandchildren to fund our lifestyles today.

3. Monetary stimulus / financialization. If private investment sags (because there are few attractive investments at today’s nosebleed valuations and few attractive investments in a global economy burdened with massive over-production and over-capacity), drop interest rates to zero (or below zero) to “stimulate” new borrowing… for whatever: global carry trades, bat guano derivatives, etc.

Here is my definition of Financialization:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

That is a mouthful, so let’s break it into bite-sized chunks.

Home mortgages are a good example of how financialization increases financial profits by jacking up risk and distributing it to suckers who don’t recognize the potential for staggering losses.

In the good old days, home mortgages were safe and dull: banks and savings and loans institutions issued the mortgages and kept the loans on their books, earning a stable return for the 30 years of the mortgage’s term.

Then the financialization machine revolutionized the home mortgage business to increase profits. The first step was to generate entire new types of mortgages with higher profit margins than conventional mortgages. These included no-down payment mortgages (liar loans), no-interest-for-the-first-few-years mortgages, adjustable-rate mortgages, home equity lines of credit, and so on.

This broadening of options (and risks) greatly expanded the pool of people who qualified for a mortgage. In the old days, only those with sterling credit qualified for a home mortgage. In the financialized realm, almost anyone with a pulse could qualify for an exotic mortgage.

The interest rate, risk and profit margins were all much higher for the originators. What’s not to like? Well, the risk of default is a problem. Defaults trigger losses.

Financialization’s solution: package the risk in safe-looking securities and offload the risk onto suckers and marks. Securitizing mortgages enabled loan originators to skim the origination fees and profits up front and then offload the risk of default and loss onto buyers of the mortgage securities.

To continue reading: We’re in the Eye of a Global Financial Hurricane

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The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn), by Charles Hugh Smith

Posted on April 12, 2016 | 1 comment

In a global economy in which debt is the foundation (see Debtonomics Archive), it should come as no surprise that debt merchants have done better than most. It should also come as no surprise when myriad debt bubbles eventually pop and the global economy is put through the wringer. From Charles Hugh Smith at oftwominds.com:

This predatory exploitation is only possible if the central bank and state have partnered with financial Elites.

After decades of denial, the mainstream has finally conceded that rising income and wealth inequality is a problem–not just economically, but politically, for as we all know wealth buys political influence/favors, and as we’ll see below, the federal government enables and enforces most of the skims and scams that have made the rich richer and everyone else poorer.

Here’s the problem in graphic form: from 1947 to 1979, the family income of the top 1% actually expanded less that the bottom 99%. Since 1980, the income of the 1% rose 224% while the bottom 80% barely gained any income at all.

Globalization, i.e. offshoring of jobs, is often blamed for this disparity, but as I explained in “Free” Trade, Jobs and Income Inequality, the income of the top 10% broke away from the bottom 90% in the early 1980s, long before China’s emergence as an exporting power.

Indeed, by the time China entered the WTO, the top 10% in the U.S. had already left the bottom 90% in the dust.

The only possible explanation of this is the rise of financialization: financiers and financial corporations (broadly speaking, Wall Street, benefited enormously from neoliberal deregulation of the financial industry, and the conquest of once-low-risk sectors of the economy (such as mortgages) by the storm troopers of finance.

To continue reading: The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

 

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2015: The Last Christmas in America, by Charles Hugh Smith

Posted on November 30, 2015 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

The game of enabling more debt by lowering interest rates and loosening lending standards is coming to an end.

If we define Christmas as consumer spending going up while earnings are going down, 2015 will be the last Christmas in America for a long time to come. In broad brush, Christmas (along with all other consumer spending) has been funded by financialization, i.e. debt and leverage, not by increased earnings.

The primary financial trick that’s propped up the “recovery” for seven years is piling more debt on stagnating incomes. How does this magic work? Lower interest rates.

In a healthy economy, households earn more money (after adjusting for inflation, a.k.a. loss of purchasing power), and the increased earnings enable households to save, spend and borrow more.

In an unhealthy, doomed-to-implode economy, earnings are declining, and central banks enable more borrowing by lowering interest rates to zero and loosening lending standards so anyone who can fog a mirror can buy a new pickup truck with a subprime auto loan.

The problem with financialization is that it eventually runs out of oxygen. As earnings decline, eventually there’s no more income to support more debt. And once debt stops expanding, the economy doesn’t just stagnate, it implodes, because the entire ramshackle con game of financialization requires a steady increase in debt and leverage to keep from crashing.

The trickery of substituting financialization for earned income–the trickery that fueled the last seven years of “recovery”–is exhausted.

To continue reading: 2015: The Last Christmas in America

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The Warren Buffett Economy—-Why Its Days Are Numbered (Part 2), by David Stockman

Posted on June 10, 2015 | 3 comments

Link to Part 1

From David Stockman at davidstockmanscontracorner.com:

There is no reason whatsoever to believe that the financial carrying capacity of the US economy—-or any other DM economy—-has improved since the 1980s. In fact, it has gone the other direction in recent years due to aging demographics, declining competitiveness versus the surging EM economies, dwindling rates of productivity growth and a dramatic increase in the leverage ratio against both public and private incomes.

All of these adverse macro-trends mean that the US economy’s ability to generate growth, incomes and profits has been significantly lessened. Accordingly, since its ability to service debt and equity capital at an honest market rate of return has diminished, the logical expectation would be that the finance ratio to national income would fall.

In fact, once Greenspan took the helm and his apparently atavistic embrace of gold standard money melted-down under the Wall Street furies of October 1987, the finance ratio erupted. As shown below, it has never looked back and at 5.5X national income has reached a point that would have been unimaginable on the morning of Black Monday.

Stated differently, under a regime of honest money and market determined financial prices, the combined value of corporate equities and credit market debt would not have mushroomed by 8X—- from $11 trillion to $93 trillion—- during the past 27 years. For crying out loud, the nominal GDP grew by only 3.5X during the identical span. In effect, the US economy has been capitalized at higher and higher rates for no ascertainable reason of fundamental economics.

Indeed, there is no reason why the 260% ratio of equity and credit market debt to GDP that was recorded in 1986 should have risen at all. At that point Paul Volcker had completed his historic task of extinguishing runaway commodity and CPI inflation and had superintended a solid recovery of real economic growth.

Arguably, therefore, the US economy was carrying about the right amount of finance. And, at that healthy ratio, today’s $17.7 trillion economy would be carrying about $43 trillion of combined market equity and credit market debt.

In a word, the Greenspan era of central bank driven price falsification and monetization of trillions of existing assets with credits conjured from thin air has generated a $50 trillion overhang of excess financialization. And that’s just for the US economy. In fact, the central bank error is global and the worldwide excess financialization is orders of magnitude larger.

http://davidstockmanscontracorner.com/the-warren-buffet-economy-why-its-days-are-numbered-part-2/

To continue reading: The Warren Buffet Economy, Part 2

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The One Chart You Need to Predict the Future, by Charles Hugh Smith

Posted on March 7, 2015 | Leave a comment

From Charles Hugh Smith at the oftwominds.com (bold-face type in the original):

We are witnessing a profound secular sea-change: the failure of expanding debt and leverage to lift the real economy of wages and household income.

When push comes to shove, you only need one chart to predict the future: debt and wages ( credit and compensation). This chart displays debt and wages as a ratio: debt/wages. What it reveals is the endgame of financialization: creating more debt no longer pushes wages higher.

I have broken the past five decades decades into easily recognizable economic periods. During the organic growth of the 1960s that many view as the ideal–what I term the pre-financialized economy, the line is almost flat, as debt and wages expanded in a balanced fashion.

http://charleshughsmith.blogspot.com/2015/03/the-one-chart-you-need-to-predict-future.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+google%2FRzFQ+%28oftwominds%29

To continue reading: The One Chart You Need to Predict the Future

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