



Thank you sir! May I have another.

“You can’t have a liquidity crisis when the stock market is setting record highs for an entire week. Those two things just don’t correlate.” — Pam Martens

Like the furor over last week’s outrage (the Soleimani assassination), last year’s repo frenzy seems to have evaporated. The Fed stuffed the market with hundreds of billions before year’s end, there was no panic, afterward the Fed soaked up excess liquidity with a reverse-repo operation. Meanwhile, the Fed is still purchasing Treasury bills (less than one-year maturity) which is part of its ordinary business; conducting open market operations to keep short term interest rates below 2%.

There is still no ready answer for why there was a crisis in repo in the first place. Besides bailing out the banks, or the dollar funding system generally, the Fed might have been wasting its time, practicing or more likely bailing the too big to fail billionaires for political reasons, mindful that practically everything the Federal Reserve does- or might do provides elites with an (invisible) helping hand. Along with fighting endless (losing) wars and cannibalizing our resource base, bailing out our betters has been our national project since the founding of the country.

One would think after all this time they wouldn’t need any more support, right?

One of the many concepts economists fail to explain clearly is how people become rich. One would think in a capitalist-friendly system such as the one we live under, how wealth begets itself would be well understood. The popular narrative suggests tycoons are heroic, farsighted innovators who will into existence products and services that people don’t realize they need. They offer these in enormous quantities at a profit. which occurs when returns exceed factor expenses. Given enough profits entrepreneurs reward themselves with luxury cars, mansions, drug habits and mistresses. And pay cash. This is the narrative found in economic doctrine, outlined in excruciating detail by Adam Smith to Friedrich Hayek to John Maynard Keynes and it’s nonsense.

At scale industrial enterprises don’t create profits because they are unable to. That this is so is self evident: if firms were productive there would be no debt because business returns would retire it. Instead, commercial expansion carries along with it an almost unimaginable accumulation of unpaid loans; a metaphoric Everest amounting to hundreds of trillions of dollars. The only thing that can even service this amount is continual additional borrowing and the reduction of debt’s burden by inflation.

Default or repudiation does not cure indebtedness but passes repayment obligations onto third-parties as well as lenders, themselves.

All Earthly processes produce entropy, a topic conveniently absent from mainstream economics. The real, physical sum-total of all sector inputs is always greater than the sum of outputs. Regardless of what we do, including nothing, there are losses. That economists claim the opposite is a myth, enabled the purposeful mischaracterisation- and underpricing of inputs.

Because industrial enterprise is fundamentally unprofitable, debt is required for us to ‘fake it’. Debt is ubiquitous, it is a ‘factor in production’ along with land and labor. A gigantic, interconnected finance sector needed to create- and manage it. All money is debt, even the kind that is dug out of the ground or cryptoed into existence on a computer. Cash paid in hand is a loan made by a bank somewhere to someone which proceeds may have changed hands hundreds of times subsequently. There is no ‘investment’ that did not begin its existence as a loan.

People become tycoons by borrowing their fortunes and having third parties service and retire the loans. The technical term for this process is ‘theft’: I buy the house, you pay for the house … you can’t live in it. This sort of thing is possible because the unremarkable taking on of debt allows entrepreneurs to divert some of it to themselves. Another reason is social orders are built around shared narrative myths that have compulsive power, such as the heroic innovator myth, the profitable large business myth or the efficacy of technology. Abandoning these narratives represents an enormous risk, after all, it’s unthinkable what might happen if people stop believing in entrepreneurs or the moral necessity of repaying debts or the ability of technology to solve our problems? (There is no debt-repaying technology in the pipeline, by the way.)

The conventional wealth model has worked for a few individuals, allowing them to satisfy their outlandish financial dreams by way of invention, mass production and sales. How few?

A lot fewer than you think! There was a remarkable and singular array of circumstances that enabled the rise of the Beatles. The post- World War Two demographics of the English-speaking world were favorable. The infrastructure to produce large amounts of Beatles records existed before the band held their first rehearsal. Barriers to entry were low: talent (free, for those who have it), time and space to practice and play, plus the cost of some guitars and amplifiers. The individual products they sold were inexpensive: five dollars or less for a long-playing record, about a buck for a two-song ‘single’. Marketing was TV and radio airplay driven by a frenzy of demand by teenaged girls which also cost the band little or nothing. Selling records did not require provision of consumer credit like cars or smartphones, the band didn’t have to obtain land, build factories or fit them out with machinery. Musicians scale: they can start like the Beatles did by selling a few thousand records, or they can sell 600 million LPs and altogether be worth over $2 billion plus publishing rights (held by Sony) worth another $3 billion. The cost to the Beatles for all this was the time to write and record the songs.

Entertainers, professional athletes and celebrities can adhere to the capitalist model and bootstrap themselves because they are marketing avatars for the industrial status quo and ‘lifestyle’. They don’t invent goods and services as much as narratives that rationalize consumption. Providing goods and services at a scale able to translate into great wealth requires significant up-front money investment for facility and equipment, human resources, R & D, management, training and marketing. For some kinds of goods like smartphones, a vast expensive support infrastructure must be in place else the phones themselves are useless: repeater stations and cell towers, data centers, fiber optic trunk lines; grid electricity to power everything along with spares and upgrades and the means to ship these things where needed. Railroads require rolling stock and locomotives, miles of trackage and marshaling yards which in turn require expensive rights of way. Cars and trucks need roads that are paid for by government borrowing, a massive fuel supply and distribution system, insurance and consumer finance plus a military to break heads overseas. These kinds of things — and the galaxy of factories needed to make them — must be entirely in place before a company’s first product can be offered for sale. This investment requires loans, how could it be otherwise? If firms and their infrastructure are able to somehow meet expenses how can they provide for expansion of firms and infrastructure going forward, particularly of competitors? If an entrepreneur lacks products to sell how does he come up the means to will them into existence? There muse be the addition of new money, this being the case then profit or gain in excess of expenses for investment purposes must be borrowed.

Had the Beatles been first required to buy a recording- and distribution business or start one from scratch, there would have been no band. They would have had to borrow tens of thousands of pounds; the four mop-haired schoolboys from Liverpool would have been unable to do so.

Entrepreneurs craft narratives used to inflate public expectations with the actual product or service becoming a kind of accessory or prop. The narrative is usually worth more than the good, a kind of abstract collateral offered to creditors who don’t want to left behind or miss ‘next big thing’. For some, such as ride-sharing, co-working, ‘fake’ meat and social media, the narrative itself is the entire business. As long as their narratives remain fashionable tycoons borrow as much they can; from investors or venture capital, then shareholders or by way of them as well as from their own customers. They also tap into the endless stream of funds borrowed by governments. Because of the positions tycoons hold in our society and the immense size of their leveraged positions, almost everything else is in line to be sacrificed so tycoons’ (borrowed) wealth remains intact.

When tycoons cast about for repayment options their first targets are their own employees. Monies not paid to workers are funds that can be directed toward creditors. So are funds from workers who overpay for the entrepreneurs’ goods and services. The best way to look at our economy is as a gigantic cost-shifting regime: debts taken on by the wealthy become the obligations of workers around the world. Even as those on the fringes in the developing world lift themselves up from destitution, they can only lift so far. Much of what they might earn in a perfect world is hived off and handed over to creditors to retire the obligations of their betters … which in turn provides incentives for tycoons to ‘accumulate’ (borrow) some more.

The borrowing-theft process allows tycoons to get rich quickly rather than building businesses and waiting for returns which, without the borrowing, would never appear! The process is used by dictators and government officials, share brokers, hedge fund managers, ordinary criminals and Ponzi scheme promoters. Obviously, tycoons who for one reason or another must repay their own loans are no longer rich. Who exactly bears the tycoons’ burden is irrelevant to them as long as the payments are made. It is reasonable the repo ‘crisis’ was an excuse for the Fed to preemptively bail out the rich.

If any group has prospered since the turn of the millennium it is the world’s financial elites. The aggregated assets of this group represent about half of the world’s wealth. Their gains outstrip those of the rest, gains which appear to increase by themselves. It’s hard to see how the rich are in any need of rescue. At the same time, they are hostage to the industrial economy as a whole, to uncertain and volatile markets and, most importantly, to the status of those tasked with repayment obligations. As the world’s resources are stripped, its citizens are becoming poorer as evidenced by the declining affordability of fuel. If people cannot buy fuel they can’t pay off others’ debts, either.

Consumers become incrementally poorer while the fuel our industry relies upon becomes scarcer and more costly. The red line indicates the highest price our economy can pay without credit seizing up. The black line represents drilling industry cost which is largely a function of geology and depletion. This rising cost trend suggests the oil industry needs $120/barrel or more to meet expanses, while the price trend indicates a price higher than $70/barrel will cause another energy/credit crisis. As depletion continues the ‘spread’ between cost and price widens meaning more loans are needed by drillers … credit that is unavailable to customers. What’s clear is the deflating price signal — the level that causes a reduction in economic activity — continues to fall over time. At some point, even an historically low price such as US$20/barrel will be unaffordable. Before that point is reached the pricing mechanism we rely on to allocate resources will be broken.

Tycoons appear wealthy, but only in abstract. Their holdings are shares of their own businesses: Bill Gates’s fortune is his Microsoft shares, Warren Buffett owns Berkshire-Hathaway, Jeff Bezos holds Amazon, etc. Shares are a form of private money. Like ordinary currencies, they are derivative claims against purchasing power, which itself is a claim against capital, the world’s remaining non-renewable natural resources. As capital is exhausted so is the worth of claims including the physical work that purchasing power represents. Looked at this way, industry itself is a kind of ‘money’, one whose inherent wastefulness tends itself toward insolvency. Yet the myth of profitability sits at the center of economics; capitalism, even Marxism and industrialization itself.

The tycoons are trapped but they hold us hostage as well. Undermining their heroic myth also undermines industrial economy and all those whose livelihoods depend on it. Meanwhile, in the background, the value of tycoons’ claims relentlessly evaporate — under their noses — leaving them with little more than spare change: some used cars, alimony payments and drug habits; the signifiers of nothing, trite and useless symbols, diversions and waste, the real ‘products’ of industrialization.

At least the Beatles left us with some nice songs to listen to.

‘Rich’ is not what it used to be, it is another bubble, a form of asset inflation. Like the banks, billionaires are tightly bound to the credit regime and dependent upon it. Tycoons’ market positions are so large, converting them to currency and reducing them would effectively be the same as liquidation. At half the world’s wealth, the assets vastly exceed available liquid funds. Conversion could be ruinous of the system the tycoons themselves rely on, a reason for the flood of loans from the Fed to the banking system. That the rich are beneficiaries would be the reason for the central bankers’ silence.

It is possible we are undergoing a kind of ‘wealth crisis’, something hidden. Instead of an onrushing recession or the usual turning of the business cycle, inventory excess, balance sheet irregularities or fuel shortages. Surplus wealth like the other kinds are subject to The First Law, whereby the costs of managing any surplus increase along with it until at some point costs exceed what the surplus is worth. How these surplus-related costs emerge can be hard to discern. A billionaire cost crisis might include riots in the streets, or the Fed bailing out the repo market when stock prices are at an all time high. It’s also hard to say is how this particular kind of ‘crisis’ might play out. The recent shift from negative interest rates and the massive losses that shift represents to bondholders might have been a trigger for central bank action. Yet the costs might include the banks losing control over policy interest rates. Time will tell but, in an environment that is defined by debt, any billionaire in trouble reflects on the others who are similarly situated.

Part 1: The Gift That Keeps on Giving

Part 2: Bailing Out the Rich