Power & Market

It's time to reprogram the conditions of the economy to serve the many rather than the few.

Star Trek's Kobayashi Maru training exercise tests officer candidates' response to a no-win scenario: any attempt to rescue the crippled ship's crew results in the destruction of the candidate's ship, while standing by and taking no action results in the loss of the Kobayashi Maru's crew.

Captain Kirk famously defeated this no-win scenario by reprogramming the simulation to "change the conditions of the test." This can be viewed as either cheating or as creative problem-solving via "thinking outside the box."

The Kobayashi Maru is a very apt description of both the U.S. and the global economies, which are currently running a real-world no-win scenario called "Profits, Infinite Growth, Low Inflation, Full Employment." (PIGLIFE). To win in the PIGLIFE scenario, you need permanent expansion of GDP, consumption, profits and employment and a permanently low limit on inflation. Anything less and you lose.

Central banks and political leaders have managed to "win" the PIGLIFE scenario for decades, but at a cost that can no longer be cloaked by happy-happy statistics. The economy has been fatally hollowed out into a fragile shell of monopolies and cartels profiting from hyper-financialization and hyper-globalization, a system in which the only possible outcome is hyper-inequality and hyper-self-exploitation as the immense profits enable the purchase / capture of political and regulatory power.

Now that the PIGLIFE economy has stripmined all the easy-to-exploit resources and workforces, scarcities are pushing inflation far above the "winning" low level. Oops, you lose. Now the real teeth in the Kobayashi Maru scenario are bared: if Central banks and political leaders close the spigots of "free money" that's been expanding GDP, consumption, profits and employment for decades, then all those slide from expansion into contraction.

But if they keep the spigots of "free money" wide open, inflation threatens to feed back in a self-reinforcing loop of expectations of higher inflation that push inflation higher, which then justifies the expectations which then push prices, wages, etc. higher.

Meanwhile, the two engines of the PIGLIFE expansion, hyper-financialization and hyper-globalization, have dived off the cliff of diminishing returns. Boosting debt, leverage and globalized supply chains aren't generating expansion, they're actively undermining whatever "growth" is still sluicing through the PIGLIFE economy.

So sorry, Central banks and political leaders, you lose. The way you've rigged the system, it goes into self-reinforcing contraction if you close the spigots of "free money" even modestly. But if you don't, the Klingon ships of inflation destroy you. The more you push hyper-financialization and hyper-globalization as "solutions," the greater the destruction.

Clearly, we need a new set of conditions for prosperity and well-being that do not rely solely on expanding GDP, profits, consumption and employment. Many economists, for example, Joseph Stiglitz, have proposed retiring GDP as a measure of prosperity and well-being and using more accurate and sustainable measures of well-being to inform policies.

If we've learned anything, we've learned that enriching the already super-rich so they have even greater means to distort democracy to serve their private interests undermines the prosperity of the many rather than increases it. It's time to reprogram the conditions of the economy to serve the many rather than the few, and enable a truly winnable scenario of sustainable prosperity and well-being by tossing the "waste is growth / Landfill Economy" PIGLIFE model into the toxic waste dump of failed, no-win scenarios.

 “An economic foundation that was built on cheap money and debt.”

Bond and equity markets have collectively seen one of their worst years on record. 

This may come as a shock to those who have followed mainstream financial outlets over the past two years, as everyday we were reminded of the “robust” recovery and “strong” labor market. 

But our economy is far too dependent on central bank policy. Peter Boockvar is a financial analyst with the Bleakly Financial Group. He sums the problem up succinctly: 

Markets and the economy… do well when the central banks are easing and cost of capital is cheap and the liquidity is flowing. But then it all reverses when they tighten monetary policy.

Boockvar adds that we are operating under “an economic foundation that was built on cheap money and debt.” Low interest rates, while incredibly stimulative for capital markets, have destroyed small/medium sized businesses and injured most banks. 

Smaller banks without access to cheap liquidity must earn the old fashioned way - lending out deposits and capturing the spread. In the falling interest rate environment of the last 40 years, these spreads have become increasingly thin, which might explain why the number of banks in the US fell by 80% from 1980 to 2020.

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Another consequence from decades of accommodative monetary policy is, according to Boockvar, the exponential increase in economic fragility that results from each subsequent easing cycle. 

As interest rates remain low, businesses and households are able to borrow more. Then, when the Federal Reserve decides it is time to tighten, the large accumulation of debt means the economy cannot bear even moderately higher rates. 

This dynamic is clearly represented in the historical Fed Funds Rate chart:

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We see that since the 1980’s, when Volcker aggressively tightened into recession to tame inflation, each subsequent Fed tightening cycle was unable to reach its previous height before triggering a recession (indicated by the gray vertical lines). 

This tightening cycle will be no different, and in fact may be worse. 

According to Boockvar, “We’re just getting a rerun of the same movie we’ve seen many times before… This is a sequel with scarier characteristics,” due to inflation and rapid pace of the central bank’s response.

The US has not seen serious inflation since the early 1980’s. Will the Fed tighten through a recession? Listen to more of Peter Boockvar’s insights in his full interview here:

Currently, a new cycle of protests involving the Ecuadorian indigenous peoples’ organization is happening, following another cycle that took place in October 2019 and paralyzed the country for two weeks, resulting in 8 people dead, various hundreds of other people injured, including law enforcement officers sent to diffuse the demonstrations. The Ecuadorian State comptroller building was burned and sacked, severely damaging the patrimonial buildings of the Spanish-style Historic District of the capital city of Quito, and overall costing the Ecuadorian economy almost $83 million in damages.

All this destruction just to force the government to reverse austerity measures decided by then President Lenin Moreno to end the government subsidies to lower gas prices, undertaken in a failed attempt to liberalize and stimulate the Ecuadorian economy.

Back then, as well as today, the protests were spearheaded by the Confederation of Indigenous Nationalities of Ecuador, known by its acronym in Spanish, CONAIE, the country’s largest indigenous organization, led by Leonidas Iza, an Andean Kichwa native, with well-known leftist sympathies and ideas, close to the thought of Peruvian agrarian socialist ideologue, José Carlos Mariátegi, whose ideas (along with those of China’s Mao Zedong) would inspire the activities of Shining Path, a communist terrorist group responsible for around 60,000 deaths in a conflict against the government of Perú that has lasted for four decades.

But back to Iza, only a little more than a year after the 2019 protests, he co-authored, with a couple of leftist academics aligned to his Marxist-indigenous cause, a book titled Estallido (a term that could be translated as outbreak) in which they outlined the steps in their revolution towards power. The first step calls for direct action against government institutions and capital structures and the second is defining their friend/enemy distinction between various local leftist groups, including worker unions, the indigenous peasantry and progressive allies in cities against what they consider to be a counterrevolutionary alliance of right-wing populists, banking conservatives, social-democratic technocrats, a bureaucratic bourgeoisie and modernizing liberals.

He and his co-authors continuously quote the work of Mariátegui, as well as of others Socialist intellectuals like George Sorel, who is particularly known for his advocacy of violence, and end their book with the battle cry of “Amerindian communism or barbarism,” as if the actions of their movement in the 2019 protests were not barbaric, and, on the contrary, the market structures of capitalism were the true oppressors.

Iza’s actions and his book were praised by many people in Ecuador, mostly urban intellectuals, looking to capitalize on the situation and get court positions in the potential new order under the Marxist-indigenous leader. The intellectuals, however, do not realize the danger his ideas represent for Ecuadorian society, because, in many senses, what Iza did, promotes and is trying to repeat right now, is just another chapter in the long and bloody history of the global left, from Marx to Hitler, as accounted by Erik von Kuehnelt-Leddihn.

However, Leonidas Iza and his “Amerindian communism” should not be just considered as another case of intellectual leftism that appeals to those “who dream of action but never act,” as described by Mises. Instead, he is an alarmingly latent Pol Pot wannabe, for whom his vision of an indigenous, fully agrarian socialist country has to be built from the ashes of a failing republic consumed by the fire of revolution, a view he has repeatedly advocated for by demeaning the majority mestizo ethnic group in Ecuador while protecting himself from accusations of racism by virtue-signaling his indigenous ethnicity.

By his actions, Iza’s movement and ideas prove, once again, that Mises was right by defining fascism in the same terms as socialism, that is, that:

    …the fundamental idea of these movements […] consists in the proposal to make use of the same unscrupulous methods […] to exterminate its adversaries and their ideas in the same         way that the hygienist strives to exterminate a pestilential bacillus; it considers itself in no way bound by the terms of any compact that it may conclude with opponents, and it deems any      crime, any lie, and any calumny permissible in carrying on its struggle.

Nevertheless, for a self-professed Marxist follower of Andean-style Maoism, Iza’s Amerindian communism tends to be closer to fascism than to Marxism itself, given that, as Roderick T. Long explained,

     …where Communist ideology tends to be cosmopolitan and internationalist, fascist ideology tends to be chauvinistically nationalist, stressing a particularistic allegiance to one's country,       culture, or ethnicity; along with this goes a suspicion of rationalism, a preference for economic autarky, and a view of life as one of inevitable but glorious struggle….

All of these elements are present in the direction CONAIE has been tacking under Iza’s leadership, given its close indigenous ethnic component, its fondness for direct action and local, backwards agrarianism, and its violent effort for political dominance. Of course, the agrarian socialism he promotes should be by itself another big red flag, pun intended, about his intentions, for which a number of logical inconsistencies become more and more apparent the moment one stops to think about them.

For instance, he has continuously given contradicting public statements calling for the end of the oil extraction industry in Ecuador and then shouting about keeping gas prices under government subsidies, arguing that artificially low prices are a necessity for the use of tractors in agriculture. This when tractors themselves are a capital good that almost no already poor Ecuadorian indigenous peasant could even try to afford under our highly intervened economy.

All of these incoherencies are then promoted under the wraps of a political discourse with heavy Ted Kaczynski undertones, which could only mean that if his brand of Amerindian communism ever gets applied, it would only mean a man-made Malthusian trap. His actions also speak for him, as for the times he has called for public demonstrations, private property has suffered the most, with businesses having to close for many days, going bankrupt, and looting becomes commonplace with the mere notice of his calls to action against the government.

Leonidas Iza is the kind of person that reminds us that we still have to fight the last wars against socialism, for his ideas and his actions would only bring even more ruin to a country like Ecuador., To simply defeat him, however, would mean nothing when ideas like his can be easily recycled by other socialist opportunists, for socialism, which appeals to envious people who crave for security and are afraid to make decisions for themselves, must vanish from the minds of reasonable human beings, as it impairs human dignity and crushes man utterly, a lesson learnt from both Austrian intellectual powerhouses, Mises and Kuehnelt-Leddihn.

Seventeen months ago, as the keys to the oval office changed hands, for all of the political animus and theatrics, one thing seemed a given: the US economy would roar back to vitality in historic fashion, a point of optimism in a nation of discord and incertitude. Yet hope would give way to ambivalence, which, in turn, gave way to serious doubt. Today, a pathetic 23 percent of Americans feel economic conditions are even “somewhat good.” The primary reason for such abysmal economic sentiment? Inflation.

As consumer prices have accelerated out of control over the past year, a new political narrative on inflation has emerged, one that alleges corporate impropriety as the primary catalyst. The motive for such a messaging shift from select members of the political apparatus is clear: a need to shirk accountability for evidently inflation-inducing policies. Unfortunately, the corporate greed narrative has apparently paid dividends to its progenitors, garnering increasing acceptance among the body politic at large. Indeed, according to one poll from Data For Progress, a majority of likely voters now believe price-gouging is a major contributor to heightened inflation. However, that inflation is brought about by corporate greed is a sophistic political lie in every respect.

Yes, corporations are greedy. People are greedy. It turns out that greed is a natural characteristic of the human condition. It always has been. Why, then, has inflation only recently exploded after 40 years of calm, now clipping along at better than four times the Federal Reserve’s target annual rate of two percent?

In May 2020, the Consumer Price Index (CPI) grew just 0.1% year-over-year. Are we to believe that corporations were simply feeling particularly benevolent, only to reverse course in dramatic fashion the very next year? Of course, that is preposterous. 

But the prevailing evidence that peddlers of the corporate greed narrative have repeatedly cited is the reality that corporate profits are at historic highs. This is, in fact, true. But it is entirely irrelevant to inflation itself and is not even indicative of any measurably intensified greed.

The Producer Price Index (PPI), which measures cost increases for businesses, is up 10.8 percent from last year. With consumer prices rising at 8.3 percent over the same period, this frankly means that American businesses en masse are likely not even passing on the full extent of the higher costs they themselves are paying, to consumers. So how can this be, even as corporations are raking in record profits? The answer lies in a distinction that the corporate greed crowd will never make: the distinction between corporations and businesses. 

In fact, just five percent of businesses are corporations. While the CPI measures the general prices that businesses are charging, corporate profits figures only measure the profits of large corporations. Yet it is chiefly small businesses that cannot afford significant increases in the cost of doing business because they have fewer resources than their larger corporate counterparts. Thus, it is highly probable that small businesses, which account for nearly half of American GDP, are primarily driving broad price increases, on no account of elevated greed, but rather as a result of an increase in their own cost of doing business.

Former Labor Secretary Robert Reich is perhaps the most prominent purveyor of the corporate greed doctrine of inflation. If anyone can point to resounding evidence of malign corporate price-gouging, it should be Reich. In an article laying out his argument for “corporate power” being the catalyst behind record inflation, Reich condemns multinational coffeehouse chain Starbucks for announcing price hikes earlier this year despite being “so profitable.” 

What the twice Ivy-educated pundit fails to mention is that Starbucks’ Q1 2022 earnings were cut by more than half when compared to Q4 2021, despite revenue holding steady. Q2 2022 earnings dropped below that of even Q1. What’s more, the company reported lower earnings in 2021 than it did back in pre-Covid 2018, despite having higher revenues. Reich even conveniently ignores the fact that Starbucks recently revealed it would be raising its minimum wage to $15 per hour nationwide beginning this summer. 

Evidently, Starbucks isn’t the insatiably gluttonous enterprise that Robert Reich would like you to believe it is. And this seems to be a common theme with many of the companies that he and others proffer as evidence of nefarious profiteering. But it still doesn’t answer for why corporate profits are at historic highs. First, it is important to understand that corporate profit margins are not significantly higher than they were pre-Covid. With that established, it is likely that inordinate growth in consumer spending since the Covid recession is largely to blame for record profits. Needless to say, when Americans drop unprecedented quantities of cash on consumer products, companies whose costs don’t rise significantly fare pretty well.

Certainly, it is understandable how the corporate greed dogma has caught on with vast swathes of the American public. Rancorous anti-corporate sentiment has been prevalent in America for years, and corporations, as such, make for quite convenient political scapegoats. But any effort to broadly place culpability for inflation on the private sector is demagoguery at best, and almost always attempted by ultracrepidarian activists rather than studied economists. 

The reality is that the true offender behind record inflation is the US government. The Federal Reserve has inflated the money supply by over 40 percent since the beginning of 2020, allowing congress to hand out checks to the public and driving an unhealthy initial spike in disposable income. As consumers spent off this superficial wealth, prices soared and disposable income tumbled. Consequently, today, as inflation ravages the wallets of everyday Americans, disproportionately impacting low-income families, the personal savings rate has plunged to just half of what it was in early 2019 and is now rapidly approaching all-time lows. 

American citizens are being forced to spend larger portions of their income on basic necessities and mundane lifestyle items, leaving less–or no–room for economically stimulating investment or leisure. The great evils of government–not corporation–inflation are every day becoming increasingly apparent.