Do The Roots Of Rising Inequality Go All The Way Back To The 1980s?

Authored by Charles Hugh-Smith via OfTwoMinds blog,

Unless we change the fundamental structure of the economy so that actually producing goods and services and hiring people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

I presented this chart of rising wealth inequality a number of times over the past year. Do you notice something peculiar about the inflection points in the 1980s?

Correspondent W.S. noted that the inflection point for the top .1% (late 1970s) preceded the inflection point of the bottom 90% (around 1986): both increased their share of household wealth from 1978 to 1986, and then the share of the top .1% took off, essentially tripling from 8% to over 22%, while the share of the bottom fell precipitously from 36% to 23%.

(Note that the data stops at 2012; if we extend the trends to the present, the lines have certainly crossed and the share of the .1% now exceeds that of the bottom 90%.)

So what happened between 1978 and 1986? The first phase of the financialization of the U.S. economy. What is financialization? In a financialized economy, speculating with highly leveraged debt and exotic financial instruments is far more profitable than producing goods and services.

Financialization hollows out the productive assets of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites' ownership of the government's regulatory and legislative bodies.

Here is another less pungent description via Wikipedia: "Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics."

Here is my more formal definition:

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.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

I describe the dynamics in What's the Primary Cause of Wealth Inequality? Financialization (March 24, 2014)

Correspondent W.S. submitted commentary and references this 2005 book Financialization and the World Economy:

In the US "total credit market debt divided by GDP was about 1.5 from 1961 to 1981. It accelerated rapidly in the decade of the 1980s – from 1.6 in 1981 to 2.3 in 1989 – as the federal budget deficit soared, hostile takeovers and leveraged buyouts loaded corporations with debt, and household borrowing increased. Corporate and household borrowing raised indebtedness further in the 1990s; by 2001 the debt to GDP ratio was 2.8, almost double the ratio in the Golden Age. Moreover, average real interest rates have been much higher in the neoliberal era than they were in the three decades that preceeded it.

W.S. Also referenced FINANCIALIZATION OF THE ECONOMY and added this commentary:

While “bloated” conglomerates were linked by some to the sluggish performance of the American economy in the 1970s, for corporate raiders they presented a get rich quick opportunity via the “market for corporate control” (Manne 1965). Outsiders could buy the firm from its existing shareholders, fire its managers, and sell off the parts for a quick profit.

After the election of Ronald Reagan in 1980, this became possible on a grand scale due to relaxed antitrust guidelines, changes in state antitakeover laws, and financial innovations that enabled raiders to get relatively short-term financing on a large scale (Davis & Stout 1992). Within a decade, nearly one-third of the Fortune 500 largest industrial firms had been acquired or merged, often resulting in spinoffs of unrelated parts, and by 1990 American corporations were far less diversified than they had been a decade before (Davis et al 1994).

The other thing that happened in the mid-1980s was computer technology became cheap enough and powerful enough to start replacing human labor on a wider scale. Spreadsheets such as Excel became accessible to small business, and the desktop publishing combo of the Apple Macintosh and laserprinters revolutionized the cost structure of marketing.

The rise of the Internet (coupled with cheap memory and processing power) further fueled the productive expansion of digital technologies. As I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy, these tools– which are now ubiquitous and inexpensive–enable one person today to equal the output of what once took four people to produce in the late 1980s.

In effect, labor entered an era of dynamic over-supply just as healthcare costs began to rise, making it more costly to hire workers. Some skills and trades remain scarce and thus well-paid, but as a generalization it became cheaper and more efficient to replace increasingly expensive human labor with increasingly inexpensive and powerful software and digital tools.

Unless we change the fundamental structure of the economy so that actually producing goods and services and maximizing opportunities for people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

Recent podcasts/video programs:

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Week in Review: Stocks Shake Off Health Care Worries to Climb for Week, First Quarter

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Americas Roundup: Dollar on Track for Best Week This Year, US Stocks Ends With Losses, Gold Posts Best Quarter in a Year

Market Roundup

•    US consumer spending slows +0.1% v 0.2% forecast & previous; but inflation is rising PCE price Index y/y 2.1% v 1.9% previous.

•    US Personal income m/m 0.4 v 0.4% forecast 0.5% previous.

•    US Chicago PMI 57.7 v 56.9 forecast, 57.4 previous.

•    U Mich sentiment final 96.9 v 97.6 forecast, 97.6 previous.

•    U Mich expectations final 86.5 v 87 forecast, 86.7 previous.

•    U Mich 1-yr inflation final 2.5% v 2.4% previous, 5-yr 2.4% v 2.2% previous.

•    Atlanta Fed’s GDPNow: US econ seen growing 0.9% in Q1 vs 1% March 24.

•    NY Fed’s Nowcast: US economy seen growing 2.87% in Q1 v 2.96% Mar 24; Q2 seen growing 2.58% v 2.66% Mar 24.

•    Fed’s Dudley A couple more hikes this year reasonable, not at stage where there is great urgency to tighten policy.

•    Fed’s Kashkari: Fed needs to be more transparent on how it makes decisions.

•    Fed’s Bullard: Ending bond reinvestments could cause Fed to slow US rate hikes.

•    Euro zone inflation plunge may vindicate cautious Draghi, Inflation in currency union falls to 1.5% in March.

•    ECB’s Coeure: ECB guidance valid but order of next steps could change.

•    Top Venezuela official breaks with government, protests escalate.

•    Stocks dips as investors lock in gains after strong quarter.

Looking Ahead – Economic Data (GMT)

•    23:30 Australia AIG Manufacturing Index Mar 59.30-previous

•    23:50 Japan Tankan Big Mf Index Q1 forecast 14, 10- previous

•    23:50 Japan Tankan Big Manufacturing Outlook DI Q1 forecast 13, 8- previous

•    23:50 Japan Tankan All-Big Capex Est Q1 forecast -0.10%, 5.50%- previous

•    23:50 Japan Tankan Small Manufacturing Index Q1 forecast 3, 1- previous

•    23:50 Japan Tankan Small Manufacturers Outlook DI Q1 forecast 1, -4- previous

•    23:50 Japan Tankan Small Non- Manufacturers Index Q1 forecast 2, 2- previous

•    23:50 Japan Tankan Small non- Manufacturers outlook DI Q1 forecast -1, -2- previous

•    23:50 Japan Tankan All Sm Capex Est Q1 forecast -18.40%, -6.20%- previous

•    00:30 Japan Nikkei Mfg PMI Mar 52.6- previous

•    01:30 Australia Building Approvals* Feb forecast -0.5%, 1.80%- previous

•    01:30 Australia Private House Approvals* Feb -3.00%- previous

•    01:30 Australia Retail Sales MM* Feb forecast 0.3%, 0.40%- previous

•    01:45 China Caixin Mfg PMI Final Mar forecast 51.6, 51.70- previous

Looking Ahead – Events, Other Releases (GMT)

•    No Significant Events

Currency Summaries

EUR/USD is likely to find support at 1.0643 levels and currently trading at 1.0672 levels. The pair has made session high at 1.0702 and hit lows at 1.0668 levels. The euro dipped against the U.S. dollar on Friday as investors revised their expectations for when the European Central Bank will begin to tighten monetary policy and uncertainty over a series of elections in Europe weighted on euro.Dollar was flat on Friday as a Federal Reserve official's seemingly dovish remarks and uninspiring data on the U.S. economy doused the sanguine mood from earlier this week. New York Fed President William Dudley, seen as one of the most important members of the Fed's rate-setting committee, said the central bank was in no rush to tighten monetary policy. U.S. economic data on Friday, meanwhile, was a mixed bag, with the rise in year-on-year inflation to a nearly five-year high, a stronger-than-expected factory activity in the U.S. Midwest and easing consumer sentiment for March. The report backed the Fed's view that the U.S. economy is growing at a steady, but not a rapid pace.

GBP/USD is supported in the range of 1.2451 levels and currently trading at 1.2530 levels. It reached session high at 1.2547 and dropped to session low at 1.2522 levels. Sterling rose against the dollar on Friday as mixed bag of economic numbers pushed sterling higher against the greenback, with upbeat foreign investment inflows at the end of last year offsetting another set of warning signs on household spending. The pound fell initially on the detailed breakdown of fourth-quarter gross domestic product and other data that showed consumers borrowing more, and the dominant services industry contracting for the first time since last March. But a rough halving of Britain's huge current account deficit as a percentage of output, and a rise in foreign direct investment to 110 billion pounds offered hope that one of the economy's big vulnerabilities may already be fading as ministers begin 18 months of talks on leaving the European Union. Driven by a late surge around month-end fixing of major currencies at 1500 GMT, that hope helped the pound gain almost half a percent on the day to $1.2536 by 20:00 GMT. It was also 0.2 percent higher at 85.41 pence per euro.

USD/CAD is supported at 1.3258 levels and is trading at 1.3299 levels. It has made session high at 1.3351 and lows at 1.3283 levels. The Canadian dollar strengthened against its U.S. counterpart on Friday after data showing robust domestic growth in January increased pressure on the Bank of Canada to abandon its cautious stance on a possible interest-rate hike. Canada’s economy expanded by a greater-than-expected 0.6 percent in January from December, indicating first-quarter growth will be stronger than expected. Analysts in a survey had forecast 0.3 percent growth. On Tuesday, Bank of Canada Governor Stephen Poloz defended the central bank's cautious outlook on monetary policy tightening which contrasts with the U.S. Federal Reserve's hike earlier this month and plan for more – in the face of recent stronger-than-expected domestic data. The chance of a Bank of Canada interest rate hike this year rose to nearly 30 percent from less than 25 percent before the GDP report, data from the overnight index swaps market showed. The Canadian dollar was last trading at C$1.3310 to the greenback, or 75.20 U.S. cents, stronger than Thursday's close of C$1.3334, or 75.00 U.S. cents.

AUD/USD is supported around 0.7583 levels and currently trading at 0.7640 levels. It hit session high at 0.7651 and made session lows at 0.7621 levels. The Australian dollar declined against US dollar in the US session on Friday as investors took profits on Australian dollars initial rally. Australian dollar earlier in the Asian session powered up to daily as an upbeat survey on Chinese industry supported Australian dollar. China’s official Purchasing Managers' Index (PMI) rose to 51.8 in March, from the previous month's 51.6, as the industrial sector benefited from higher prices and a recovery in demand fuelled by a construction boom. The Australian dollar was last trading at $0.7637 after briefly popping up to $0.7750 in the early US session, but quickly fizzled to as low as $0.7622 in the US session. The Aussie is set to end the week slightly higher, having traded in a sideways direction since the beginning of week.

Equities Recap

European shares sealed their best quarter since 2015 on Friday, with inflows to European equities picking up on strong economic data and corporate earnings, despite a packed political calendar ahead.

UK's benchmark FTSE 100 closed up down 0.4 percent, FTSEurofirst 300 ended the day up by 0.20 percent, Germany's Dax ended up by 0.4 percent, France’s CAC finished the day up by 0.5 percent.

Wall Street fell on Friday, pulled down by Exxon and JPMorgan Chase as investors wrapped up a strong quarter and weighed whether corporate earnings reports will justify the market's lofty valuations.

Dow Jones closed down by 0.31percent, S&P 500 ended down 0.22 percent, Nasdaq finished the day down by 0.03 percent.

Treasuries Recap 

U.S. Treasury debt yields fell on Friday after a chorus of Federal Reserve officials questioned the need for a faster pace of interest rate increases given tame inflation and just modest growth in the U.S. economy.

In late trading, U.S. 10-year notes were up 6/32 in price to yield 2.396 percent, compared with 2.418 percent on Thursday.
U.S. two-year note yields were at 1.257 percent, down from 1.286 percent late on Thursday.

Commodities Recap

Gold notched a quarterly gain of about 8.4 percent on Friday, marking its best quarter in a year, as uncertainty over U.S. President Donald Trump's tax and investment plans and elections in Europe fueled demand for bullion as a safe haven.

Spot gold was up 0.4 percent at $1,247.4 an ounce at 3:48 p.m EDT (1948 GMT). U.S. gold futures ended the session 0.2 percent higher at $1247.30 an ounce.

Oil prices fell on Friday after a three-day rally ran out of steam as a higher U.S. rig count signaled rising production from shale, contributing to the global supply glut.
​
Brent futures settled down 13 cents at $52.83 a barrel. The contracts have lost around 7 percent since the previous quarter, the largest quarterly losses since late 2015.

U.S. crude futures settled up slightly, rising 25 cents to $50.60 a barrel after slipping below $50. They ended the quarter at about 5.7 percent lower, also the worst quarterly loss since late 2015.
 

The material has been provided by InstaForex Company – www.instaforex.com

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Trader Warns Of Week Ahead Event Risk: “If You Thought This Week Was Bad…”

It was a week when the world was supposed to come to an end, notes Bloomberg's Richard Breslow, but then it didn’t…

 I can’t say I’m disappointed, but it sounds like a lot of people are. Curious. Equities, the dollar and bond yields were put to the test on the failure of Congress to pass new health care legislation. All three survived the challenge. The Republicans have vowed to try again.

 

 

Article 50 was triggered in the U.K. and the market, with remarkable maturity, took it with calm. It’s going to be a long, perhaps ugly slog, with a lot of noise and posturing for the foreseeable future.

 

Very soft German and European-wide inflation numbers helped further deflate any expectations of near-term ECB hawkishness. Euribor futures moved steadily higher over the course of the week. Thursday’s release of the ECB minutes from their March “hawkish” meeting takes on added interest amid comments that the market misconstrued the message.

But Breslow warns, next week’s big events include a meeting between the Chinese and American presidents. Don’t underestimate the importance of it or the market interest it will garner. And the U.S. non-farm payroll report, where yet another good set of numbers has been penciled in. Perhaps adding fuel to the upbeat and hawkish Fed speeches of this past week.

Here's what Breslow sees as most critical next week…

  • On Monday, the Bank of Canada releases its business outlook survey. The last report portrayed investment and hiring outlook as far more bullish than the caution consistently expressed by Governor Stephen Poloz. With the currency in a very tight range, we could see a breakout in either direction depending on the results.
  • The RBA will announce its latest rate decision on Tuesday. Nothing expected from this meeting, but speculation keeps ebbing and flowing on their next move. At their last meeting there were some incrementally hawkish tweaks to the language. Their comments on labor conditions and housing prices will be key. The Australian dollar remains sneakily bid.
  • Wednesday’s FOMC minutes come amid a synchronized chorus of upbeat speeches by Fed speakers. If the minutes are hawkish, reinforcing rather than showing recent comments as evolutionary, the short-end of the Treasury curve will have to take notice.
  • ADP releases its monthly employment report. Last month it gave an accurate hint that NFP was going to be a beat. With 180k forecast, it will influence all expectations for Friday, no matter how many people claim it won’t.
  • Thursday looks like a big day. Chinese President Xi Jinping visits U.S. President Donald Trump’s southern White House. Worryingly, and sadly not unexpectedly, Trump warned that these talks could be “very difficult” Perhaps by lowering the bar sufficiently there’s a greater chance of the meeting being a success. The Chinese, for their part, refused to take the bait and have expressed optimism for a constructive exchange. It’s a big event and there are many issues up for debate. Join the rest of the world in watching this with great interest.
  • The ECB minutes from their March meeting will move the currency and bond markets. Were they hawkish? Was it all a misunderstanding? Have subsequent inflation reports rendered them dated? The release has a good chance of stirring up a fair amount of Sturm und Drang. Perhaps appropriately, as ECB President Mario Draghi will be speaking at Goethe University shortly after.
  • And then on Friday, there’s non-farm payrolls. There’s little in the economist median forecasts to suggest an expectation of some payback from last month’s strong report. Although, I’d note that the dispersion of predictions looks wider than usual. Once again, focus on wages.

Perhaps that uncertainy explains the divergence below as traders push into protection…

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U.S. Petroleum Exports Climb to Record as <b>Crude</b> Output Grows

The year 2017 started off with a bang for American oil companies as total crude and petroleum products exports rose to a record 5.69 million barrels a …

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