During Friday’s bloodbath, I heard a CNBC anchor lady
assuring her (scant) remaining audience that Brexit wasn’t a big sweat.
That’s because it is purportedly a politicalcrisis,
not a financial one.
Presumably in the rarified canyons of Wall Street, politics
doesn’t matter much. After all, when things get desperate enough, Washington
caves and does “whatever it takes” to get the stock averages moving upward
again.
Here’s a news flash. That’s all about to change.
The era of Bubble Finance was enabled by a political
abdication nearly 50 years ago. But as Donald Trump rightly observed in
the wake of Brexit, the voters are about to take back their governments,
meaning that the financial elites of the world are in for a rude awakening.
To be sure, the apparent lesson of the first TARP
vote when the bailout was rejected by the House in September 2008 was that
politics didn’t matter so much.
Wall Street’s 800 point hissy fit was all it took to prostrate
the politicians. Indeed, the presumptive free market party then
domiciled in the White House quickly shed its Adam Smith neckties and forced
the congressional rubes from the red states to walk the plank a second
time in order to reverse the decision.
There was a crucial predicate for this classic crony
capitalist capture of the authority and purse of the state, however, that
should not be overlooked. Namely, that in the mid-cycle period of the world’s 20-year experiment in central bank
driven Bubble Finance the rubes had not yet come to fully appreciate that they
were getting the short end of the stick.
Indeed, the earlier phases of the bubble era witnessed an
enormous inflation of residential housing prices. For instance, between
Greenspan’s arrival at the Fed in August 1987 and the housing bubble peak in
2007, the value of residential housing rose from $5.5 trillion to $22.5 trillion or by 4X.
The greatest extent of the housing bubble occurred in the
bicoastal precincts, of course. But it did lift handsomely the value of 50
million owner-occupied homes in the flyover zone, as well.
Accordingly, the latter did not yet see that the
new regime was stacked in favor of the top 10% of the economic
and wealth ladder, which owns 85% of the non-housing financial assets. And
that the speculative casinos of Bubble Finance would be an especially
verdant source of windfalls for the top 0.1%.
Indeed, the
entire 13 percentage points of the wealth pie lost by the bottom 90% of
households (105 million households) during the past 30 years have been
captured by the 120,000 households at the tippy-top (0.1%).
Nor was it yet evident as to the degree to which massive
money printing under conditions of Peak Debt almost exclusively
stimulates Wall Street speculation, not main street production, jobs, incomes
and spending.
In any event, by the eve
of the great financial crisis, the GOP was actually controlled by the
racketeers of the Beltway and the Wall Street gamblers, not the red state
voters who had elected it.
In fact, Goldman’s Sach’s plenipotentiary to Washington,
Hank Paulson, was in complete command of the elected side of
government. At the same time, the Bush White House had populated
the central banking branch of the state with proponents of monetary activism,
who were more than ready to authorize “heroic” measures to reflate the bubble.
Needless to say, the leader of the pack, Ben Bernanke, had been
groomed for the role of chief bailster by none other than Milton Freidman. The
latter, in turn, had led Nixon astray at Camp David 37 year earlier when
he persuaded Tricky Dick to default on the dollar’s link to gold,
thereby opening the door to fiat money, massive credit expansion and the
modern era of Bubble Finance.
There is a straight line of
linkage from that great historical inflection point to Friday’s Brexit
uprising. Namely, Nixon’s abandonment of the Bretton Woods gold-exchange
standard, as deficient as it had been, was also a profoundly political
act.
It resulted in the abdication of economic and financial
policy to an unelected elite and their eventual capture by Wall Street and the
forces of speculation and financialization unleashed by unanchored central bank
money and credit.
Nixon’s destruction of Bretton Woods was the enabling
event. It turned central bankers and financial officialdom loose to
operate a dictatorship of bailouts, bubbles, and financialization of
economic life. And to spread this baleful regime to Europe, Japan and the
rest of the world, too.
To be sure, it took more than two decades to fully
materialize. There were deeply embedded institutional cultures and ideologies
among policy-makers that restrained opened-ended resort to the printing press
and financial bailouts.
The Paul Volcker interlude in the US and the determined sound
money regime of the Bundesbank are cases in point.
But eventually, the old regime gave way. There emerged
Greenspan’s dot-com and housing bubbles, the rise of the ECB and
the financial rulers of Brussels, the massive bailouts triggered by
the global crisis of 2008-2009, the hideous expansion of central bank
balance sheets during the era of QE and ZIRP, the emergence of
the destructive “whatever it takes” regime of Draghi and the
current financial lunacy of subzero interest rates across much of the planet.
But here’s the thing. The rubes are on to the rig.
Twenty-years of Bubble Finance have made the City of London an
oasis of splendor and prosperity, for example, but it has left the
hinterlands of Britain hollowed-out industrially, resentful of the
unearned prosperity of the elites and fearful of the open-ended flow
if immigrants and imports enabled by the superstate in Brussels. As on
observer put it, the geography of the vote said it all:
“If you’ve
got money, you vote in,” she said, with a bracing certainty. “If you haven’t
got money, you vote out.” We were in Collyhurst, the hard-pressed neighbourhood
on the northern edge of Manchester city centre last Wednesday, and I had
yet to find a remain voter.
Look at the map of those results, and that huge island of “in”
voting in London and the south-east; or those jaw-dropping vote-shares for
remain in the centre of the capital: 69% in Tory Kensington and Chelsea; 75% in
Camden; 78% in Hackney, contrasted with comparable shares for leave in such
places as Great Yarmouth (71%), Castle Point in Essex (73%), and Redcar and
Cleveland (66%). Here is a country so imbalanced it has effectively fallen
over.”
The rise of Trumpism in the US reflects the same social and
economic fracture. To wit, Bubble Finance has also drastically unbalanced the
US as between the bicoastal zones of prosperity it has enabled and the
fly-over zones its has effectively left behind.
It goes without saying that massive debt monetization and
90 months of zero interest rates has been a boon for the Imperial City. With
almost, no restraints on its ability to borrow and spend, the
military/industry/security/surveillance complex have prospered like never
before, as has the medical care cartel, the education syndicate and the lesser
beltway rackets such as green energy and the farm subsidy/food
stamp/ethanol alliance.
Likewise, asset gatherers, financial intermediaries, brokers,
punters, financial engineers and corporate strip-miners have prospered
enormously because the market has been rigged every since Black Monday in
October 1987. That is, the cost of debt and carry trades have been
falsified, downside hedging insurance in the casino has become dirt cheap
and time after time the Fed’s put has bailed-out speculations gone bust.
Even what passes for entrepreneurial breakouts in the world
of social media and new tech isn’t really. It’s just another variant of the
dot-com bubble in which a few good innovations are being drastically
over-valued (e.g. Uber) while a tsunami of worthless and pointless
start-ups have become giant cash burning machines (e.g. Tesla).
Taken all together, they are funding an ephemeral complex
of pseudo businesses, pseudo jobs and pseudo start-up networks that
are attracting tens of billions in venture capital. But that amounts to a
simulacrum of prosperity today and the substance of
tomorrow’s malinvestment waste and losses.
Meanwhile, the main street economy has atrophied. The first
round of Bubble Finance buried the middle class in debt, while the post-crisis
intensification has turned the C-suites of America into a giant stock trading
room and financial engineering arena.
Contrary to the bubble vision pattern, in fact, there has been
no business deleveraging at all. On the eve of the crisis in Q4 2007, total
non-financial business debt outstanding was $11 trillion, and it is now $13.5
trillion.
But on the margin, every dime of that massive swelling of the
business debt burden represents real economic resources cycled out of the
flyover zones and pumped back into the financial casinos and the bicoastal
elites which fatten on them.
The recent studies of the Census Bureau data which show that just 20 counties have generated
half of all start-ups since the financial crisis provides another take on the
underlying fissure. What the study describes but doesn’t explicitly articulate
is that the massive flow of venture capital to the 20 mainly bicoastal counties
and outposts of the military/industrial/security/surveillance state is itself a
product of Bubble Finance:
Americans in small towns and rural communities are dramatically
less likely to start new businesses than they have been in the past, an
unprecedented trend that jeopardizes the economic future of vast swaths of the
country.
The
recovery from the Great Recession has seen a nationwide slowdown in the
creation of new businesses, or start-ups. What growth has occurred has been
largely confined to a handful of large and innovative areas, including Silicon
Valley in California, New York City and parts of Texas, according to a
new analysis of Census Bureau data by the
Economic Innovation Group, a bipartisan research and advocacy organization that
was founded by the Silicon Valley entrepreneur Sean Parker and small group of
investors.
That concentration of start-up activity is unusual, economists
say. In the early 1990s recovery, 125 counties combined to generate half the
total new business establishments in the country. In this recovery,
just 20 counties have generated half the growth.
The data suggest highly populated areas are not adding start-ups
faster now than they did in the past; they appear simply to be treading water.
But rural areas have seen their business formation fall off a cliff.
Economists say the divergence appears to reflect a combination
of trends, all of which have harmed small businesses in rural America. Those
include the rise of big-box retailers such as Walmart, the loss of millions of
manufacturing and construction jobs across the country and a pullback in
business lending that appears to have stung small-town and rural borrowers
particularly hard.
The changes also reflect a fundamental shift over the past two
decades in which workers and industries power the country’s economic growth.
That shift advantages highly educated urbanites at the expense of everyone
else. Polling suggests it is one of the driving forces in the political unrest
among working-class Americans — particularly rural white men — who have flocked
to Republican Donald Trump’s presidential campaign this year.
In short, Bubble Finance is a giant engine of reverse Robin Hood redistribution.
It embodies a sweeping fiscal intervention in the natural flows of the
free market that punishes savers, laborers, self-funded main street
entrepreneurs and the retired populations in favor of speculators, the holders
of existing financial assets and the dealers in money.
Bubble Finance is an affront to both democratic governance and
true capitalist prosperity. The Trump voters, the Brexit voters, the
masses rallying to the populist banners throughout Europe above all else
represent a reactivation of the political machinery in a last-ditch campaign to
stop the financial elites and their regime of Bubble Finance.
Yes, this time is different, and this time, there will be no
reflation of the financial bubble like there was after Black Monday, the S&L
bust, the dot-com crash and the great financial crisis of 2008-2009.
Needless to say, the Wall Street dip-buyers and perma-bulls who
take their cues from the modern day financial ruling class are in for a shock.
And today’s statement by Martin Schulz, the President of the EU
parliament could not more aptly explain why.
Said Schulz,
“The British have violated the rules. It is not the EU philosophy
that the crowd can decide its fate“.
We think Schulz is dead
wrong.
