The Great Economic Divergence…

The Great Economic Divergence…

(Bubble, bubble) toil and trouble;
    Fire burn, and caldron bubble. 

- From the play, Macbeth, by William Shakespeare

By J.M. Hamilton (1-1-2015)

With full apologies to the Immortal Bard… His line immediately came to mind recently, when thinking of the Federal Reserve (or Fed) and the American economy.  With slight modification, this witches’ incantation fits the times.  The witches I write of, of course, are from Macbeth, and these three wise women foretold of Macbeth’s rise, and eminent downfall.  The line fits because of the rise and fall of the American economy, caused by the Fed’s magic ability to create bubbles out of thin air, only to see mayhem and collapse ensue.   Again and again, like the rising and receding of the tide…. The Fed pumps up the financial side of the economy, the side based upon debt and finance, only to see it end badly for the majority of Americans, and in particular, Main Street.  

Will the Fed ever learn?   Will Wall Street banks, shadow banking, and private equity ever learn?

That’s exceptionally doubtful, since Wall Street is driven by greed and emotion, and profits are privatized, while losses and bailouts are socialized among the 99%. 

Where’s the incentive to learn? 

The Street, like Macbeth, is marked by recidivism.  And mandate aside, the Fed has one true master, and she answers to the Cartel.  It’s just one more way ordinary Americans get screwed daily; the populism of the times, and rising support for prospective Warren and Paul presidential candidacies, suggests that Americans are waking up to the many ways in which they are getting the shaft, by the Banking cartel, monopolies, The Fed, and our crony government.

For anybody who cares to know, you really don’t have to dig hard.  The business papers, and general news press, are full of story after story on how Americans are run over and backed over, frequently and often, not just by the Street but more amazingly, by some of the icons of American business.  The recent piece about Wal-Mart being ordered by two judges to pay back wages to workers, to the tune of $188 million, is a perfect example.  Seems that Wal-Mart withheld wages, and did not compensate for breaks (often not taken) … not unlike the allegations leveled against another Fortune 500 company, McDonalds.  The original ruling against Wal-Mart took place in 2007.  One can only hope sizable interest is accruing to the plaintiffs, as Wal-Mart continues to delay payment and play legal games.

What inspires the crème de la crème of American business to rip off their employees and the American consumer?  Somebody, somewhere, inside these organizations must be doing the cost/benefit analysis.  And well, as the saying goes: crime pays.  Crime pays particularly well, when both political parties are owned by The Business Roundtable, and The Chamber.  If you operate within a monopoly or cartel, the temptation must go up exponentially, since said enterprise faces no, or limited, competition.

Wage theft is everywhere these days, and it doesn’t even have to come from your employer.  (And to be sure, many companies are guilty of no intended vice at all.)  It seems, one can no longer purchase an item, commodity, basic staple, or service without running into some sort of monopoly, monopsony, cartel, duopoly, oligopoly, or criminal enterprise.  For examples of wage theft read here, here, here, here, here, and here again.

The unholy alliance between big business and our government has never been stronger (under a Democratic Administration, no less), and unseemly profits accrue, as Horatio Alger might have put it, to the “swiftest of foot, and the devil take the hind most.”  The pols, bought off, purchased, and co-opted, pass the legislation put forth by the attorneys for the various cartels.  Politicians from both political parties respond, dutifully.

State attorney generals for sale to the highest bidder. 

A SCOTUS that more resembles nine monarchs, is the plutocracies greatest friend. 

The U.S. is the only Western democracy that has not set limits on Big Pharma’s profits, and the industry responds in kind: with price gouging, shortages of critical medicines, and tax inversions.  The SEC, the FTC, Justice Department, Congress, and the Fed turn a blind eye.  Yup, it’s all good. 

It’s no accident that over the last 35 years – a period marked by a highly accommodative/”dovish” Fed policy (barring Mr. Volcker’s time in office) – a period also marred by the laissez faire ethos and increased government deregulation – that we have seen the rise of job killing M&A activity, an increase in the number of firms in the job killing private equity industry, and the worst financial crisis since the Great Depression.  And just to drive the point, “job killing,” or the reduction in the number of jobs, also directly equates to stagnating wages.

These are just some of the ways wage theft, macro and micro, occurs on a daily basis.  There are many more.

How ironic, that it was not the Fed’s exigent and “crucial” efforts at trickle down monetary policy that finally turned this economy around… some six years into the Great Recession, but rather, the collapse of the Energy cartel.  Greed once again, came knocking on the door of the oil patch, and the American consumer is the beneficiary.  There wasn’t enough offshore oil tankers, barges, and on-shore oil storage facilities for the Koch Bros., Goldman $achs, KKR, and Exxon to store the surfeit of oil and gas.  The stock market responded in kind, with the start of a correction… that is before the Fed, once again, stepped into the breach, and assured the Lords of Finance and the Mavens of Financial Engineering that the free money for the 1% would continue, unabated.

How is it that a terrific business fundamental, like cheap and abundant energy, could be looked down upon by the Street and the stock market?  (And how is it that the business fundamentals in this country have been lame for six years, but the stock market soared anyway?)  If you read J.M.H., the answer is summed up in two words: The Fed.

Inexpensive energy – like a living wage, like inexpensive medicine, like the demise of all monopolies and cartels, and a fair and progressive tax code – means more money for the 99% to spend, and greater aggregate demand.  All positive characteristics for a robust economy, right? 

Except, these characteristics are not necessarily beneficial to the elite/1% (at least not in the short run), who have been calling the shots in this Neo-Gilded Age for some time now.  And the elite, and their apologists, are used to having their way.

We are witnessing a great economic divergence between the interests of the 1% and the 99%; a divergence of economic interests not seen between the classes, since the last Gilded Age.  Where anything that threatens: the chokehold monopolies and cartels exercise over the American consumer, short term monopolistic profits, wage theft, financial engineering, the flow of easy money from the Fed, boom/bust cycles, regulatory capture, and tax avoidance… is considered by the Street and the stock market to be bad. 

And anything that is good for employees and consumers (i.e. aggregate demand), who drive the economy:  like the break up of cartels and monopolies, mitigation of short term profit making potential in exchange for a long term glide path to prosperity for all, a living wage, the end of easy money and financial engineering (encouraged by the Fed’s policies) – so that enterprise can focus on their core business - and a progressive distribution of the tax burden… is also considered bad by the Street.  Nearly everybody – including many economists – acknowledges: what puts more money in workers/consumers pockets is good for the long-term health of the economy, aggregate demand, top line growth, Main Street businesses, job opportunities, and the American people.  And yes, in the long run, these factors are good even for the economic elite.

In short, the interests of the plutocracy/Wall Street and the 99% do not align.  Since the U.S. government is the only countervailing power that can hold the plutocracy in check, and set the rules of the road for a healthy American economy, there is also a great political divergence.  Hence, thanks to SCOTUS, the plutocracies highly successful efforts to purchase and own our state and federal governments.

Much of this sense of entitlement, and economic and political divergence, is fueled by the easy money policies of the Grand Enabler, the Federal Reserve.

John D. Rockefeller founded Standard Oil.  Recently, his heirs divested all fossil fuel interests.  Prescient?

So where’s the next bubble to come from?  Take your pick:  sovereign debt, junk bonds, sub-prime auto loans, the stock market, a debt crash in the oil/gas fields, or perhaps it’s from the hundreds of trillions in uncollateralized derivative and swaps products?  Your guess is as good as mine.  Although it’s highly probable that when one bubble bursts, it’s likely to set off a cascade of additional corrections.  The Fed’s history is haunted by such calamities, like Banquo’s ghost, inconveniently, visiting Macbeth at a most inopportune time.  None of the lessons from the ’08 financial crisis have been learned, which sets us up to repeat history, yet again.  We can largely thank Treasury, regulatory capture, a feckless Congress, and the Fed for that.  Many key reforms have been undone, and the Fed’s bubble policies continue unabated.

Let’s look at three recent examples:

·      Passed in the Crime-nibus, sorry meant CRomnibus, spending measure this December, was the provision placing the taxpayer back on the hook for the hundreds of trillions in swaps and derivatives.  Thank Mr. Jamie Dimon, the fine folks at Citigroup, Cartel lobbyist, and our U.S. Congress for this crime.  Given the bubble economy we are now in – debt being a key bubble - the banking cartel’s timing is impeccable.  Swaps and derivative products – reinsured by the American taxpayer - are used to insure debt, bonds, and bet against same.  There’s that “socialization of Wall Street losses” thing, many pundits keep writing about and Senator Elizabeth Warren has been warning us against.  Oh, and Citigroup... well they're expanding, not curtailing, their gambling operations.

·      The Volcker Rule was delayed by our beloved Fed for years to come (maybe even decades), allowing the federally insured banking cartel to continue to gamble with U.S. taxpayer money (in highly illiquid and long term business transactions, like private equity deals). 

·      And speaking of our private equity (PE) buddies… seems that our friends, Apollo and KKR, went long on the recent gold rush into oil and gas.  Of course, PE is fueled by the easy money policies of the FED, and naïve investors chasing record low junk debt yields (i.e. very little reward for a great deal of risk).  This same crew, PE, is responsible for another ill-timed investment, and the largest private equity bankruptcy in history, Energy Future Holdings or TXU.  Under the crushing pressure of a PE LBO, Energy Future Holdings (TXU) went bust in 2014.  Just ask Mr. Warren Buffett.

The Fed sure likes to keep it interesting.

Perhaps too interesting.  The power of the Federal Reserve is perhaps unmatched by any other branch of government; and yet, its tools are incredibly blunt and crude, and often deployed with many unintended consequences.  We like to talk about the three branches of U.S. government, but really there are four, including the Fed.  The heads of two of these four branches, SCOTUS and the Fed, are not subject to popular vote, nor are they subject to term limits.  

Seems that such powerful institutions, like the Fed and SCOTUS, should be more open, transparent, subject to term limits, and its members elected by popular vote.  There was a time in this country, when U.S. Senators were not subject to popular vote, but rather were elected by the pols/cronies, who made up our state legislatures.  Then, 1913 rolled around and the Seventeenth Amendment was passed, which put an end to the practice and made U.S. Senators subject to the electorate’s will. 

See, miracles do happen.  Not surprisingly, Progressives championed the 17th Amendment, while Republicans and the first Gilded Age's trusts/monopolists fought the amendment.

One doesn’t have to be a witch, or be able to foretell the future, to know that the Fed appears to have supplanted its dual mandate of maximum employment and low inflation, with maximum welfare for Wall Street and highly inflated asset bubbles.  (As a historical digression, it’s interesting to note, given the Fed’s bipolar explicit and tacit mandates, that the blue prints for the Fed were drawn up by the Wall Street cartel on Jekyll Island, GA, and that the Fed was sold to the Congress in the early 20th Century, as a means to eliminate boom/bust cycles in the economy.)  A movement towards the democratization of the Fed and of SCOTUS, term limits for all government officials (especially judges), caps on campaign contributions and the time allotted for political campaigns, and the start up of presidential election campaigns headed by common sense/populist leadership, from both political parties…. All would be a great start for 2015. 

Hey, one can dream, and we know miracles can and do happen.  Another burst bubble, and another catastrophic financial crisis, may move this country one step closer to these much-needed reforms.  I’m not smart enough to pick the day or the time of such an event (nor am I wishing such an event upon us), but smarter individuals than myself have already been quoted as stating that the next financial crisis is "inevitable."  Given the Fed’s track record, such an calamity is almost guaranteed.

And while we are compiling our 2015 wish list…. Let’s not forget: Placing limits on the true power brokers, the plutocracy, by seeing President Obama use the awesome powers of the federal government to break up monopolies and cartels.  The President has been on a roll lately, with unilateral action on immigration, renewed ties to Cuba, and finally, pulling out of Afghanistan.  The President’s poll numbers are rising.  Maybe he can spend some of his new found political capital, by saying “NO” to monopolies and cartels and the formation of same?

Who knows, with such an act, perhaps President Obama’s poll numbers and approval rating will continue to rise?  After all, what is good for the Street and the stock market is not necessarily good for Americans, businesses, investors, and the American economy.

P.S.   A very Happy New Year.

Copyright JM Hamilton Publishing 2015