RMR Special Guest Of Two Minds Charles Hugh Smith 06-25-2018

Make Capital Cheap and Labor Costly, and Guess What Happens?

June 27, 2018

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital.

If you want to understand why the global economy is failing the many while enriching the few, start with the basics: capital, labor and resources.What happens when central banks drop interest rates to near-zero? Capital becomes dirt-cheap. It becomes ludicrously easy to borrow money to buy whatever cheap capital can buy: stock buybacks, robots, automation tools, interest-sensitive assets such as housing, competitors or potential competitors, high-yield emerging-market bonds, and so on.

What happens when cartels take control of core domestic industries such as banking, defense, higher education and healthcare? Costs soar because competition has been throttled via regulatory capture, and these domestic sectors are largely non-tradable, meaning they can't be offshored and have little meaningful exposure to globalization.

Labor-intensive cartels such as these can pass on their rising costs for labor, resources and profiteering. Do you really think assistant deans could be pulling down $250,000 annual salaries in higher education if there was any global or domestic competition?

As for healthcare, I've often noted that healthcare/sickcare will bankrupt the nation all by itself. When a cartel such as healthcare / sickcare can force higher prices on employers and employees, the cost of labor throughout the economy rises.

Sickcare Will Bankrupt the Nation--And Soon (March 21, 2011)

Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will (November 23, 2011)

You Want to Fix the Economy? Then First Fix Healthcare (September 29, 2016)

As I've indicated on the chart, labor-intensive cartels in non-tradable sectors--higher education, defense/national security, healthcare and banking-- can pass on their rising labor costs to their captive customers.

Central bank policies of super-low interest rates and abundant credit for big players and financiers have made capital cheap. Given a choice between cheap-to-finance robots and software, and ever-more costly labor, what's the rational choice for employers facing unrelenting margin pressure from rising costs for virtually everything--from taxes and junk fees to resources, rent, regulatory compliance and other inputs?

It's obvious, isn't it? The rational move is use cheap capital to replace labor as fast as possible. If capital was costly and difficult to borrow, the decision wouldn't be so easy.

Cheap capital makes buying political influence easier, too. And with enough political influence, cartels can protect themselves from competition and transparent pricing.

I've marked up this chart of price changes to break out the three basic categories:

1. Labor-intensive sectors that are largely non-tradable (domestic) and dominated by cartels that can push their higher labor costs onto their customers.

2. Interest-sensitive sectors such as housing that jack up prices as cheap capital pushes valuations into bubble territory.

3. Tradable sectors exposed to global competition and capital-intensive technology such as robotics and automation.

What happens when capital is cheap, labor is costly and cartels dominate the labor-intensive non-tradable domestic sectors? Labor costs in the protected sectors soar, pushing prices higher throughout the economy, pushing employers to replace costly labor with cheap capital-intensive technology.

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital. So assistant deans, hospital managers, top-tier bankers and under-secretaries of defense are doing just fine while the Unprotected are experiencing rising costs of living and stagnating wages and employment.

How's the economy doing? It depends on which class you're in. The Protected Class is doing just fine, the class with access to cheap credit and participation in asset bubbles has never had it so good, while the Unprotected Class faces a bleak future of lower real wages, rising costs of living and a social mobility ladder with few rungs left.

Dear High School Graduates: The Status Quo "Solutions" Enrich the Few at Your Expense

June 25, 2018

You deserve a realistic account of the economy you're joining.

Dear high school graduates: please glance at these charts before buying into the conventional life-course being promoted by the status quo.

Here's the summary: the status quo is pressuring you to accept its "solutions": borrow mega-bucks to attend college, then buy a decaying bungalow or hastily constructed stucco box for $800,000 in a "desirable" city, pay sky-high income and property taxes on your earnings, and when the stress of all these crushing financial burdens ruins your health, well, we've got meds to "help" you--lots of meds at insane price points paid for by insurance-- if you have "real" insurance without high deductibles, of course.

Here's the truth the status quo marketers don't dare acknowledge: every one of these conventional "solutions" only makes the problem worse. Student loan debt only makes your life harder, not easier, as the claimed "value" of a college degree is based on the distant past, not the present. The economy is changing fast and the conventional "solutions" no longer match the new realities. But don't expect anyone profiting from the predatory profiteering higher-education cartel to admit this.

The high cost of housing isn't "solved" by buying in at the top of an unprecedented bubble. Buying into bubbles only makes the problem worse, for all bubbles eventually pop.

The "solution" to crushing levels of debt is not to borrow more just to prop up a rotten, corrupt, dysfunctional and self-serving status quo. In effect, the young generations are being groomed to be the hosts for the parasitic classes that feed on young taxpayers, student loan debt-serfs, young buyers of bubble-priced housing, unaffordable sickcare "insurance" and all the rest of the status quo "solutions."

As writer Peter Turchin has explained, societies in decline overproduce elites. Those promised an elite slot who are left out become the engine of social unrest.

The status quo claims that getting a college diploma more or less guarantees you a slot in the elite class of folks with secure incomes and opportunities to get ahead and build real wealth.

The reality is only the top 5% of the work force are doing well. So of the 33% of the work force with university diplomas, the system only creates slots for the top 15% of that educational elite. The next 15% (the rest of the top 10% of the entire work force) can pick up the 2nd tier technocrat positions and everyone else gets the scraps: insecure jobs, mediocre pay, limited opportunities.

Before you accept that becoming a debt-serf to get a college diploma is a "solution," check out the other side of that trade: the mostly older, wealthier folks profiting from your debt-serfdom.

This parasitic predation is guaranteed by your federal government: you know, the institution everyone looks to for "solutions."

How did millions of students earn college diplomas before the hyper-financialization of the economy and before assistant deans made $350,000 a year in "competitive" salaries? It's a mystery lacking any mainstream explanation.

Speaking of debt--here's the nation's total debt level: note that the amount of debt required to push GDP higher keeps increasing far faster than GDP:

As for plunking down hundreds of thousands of dollars for that little cheaply constructed stucco/particle board/plastic box: housing prices in hot markets such as Dallas and Seattle have far exceeded the previous hyper-financialized housing bubble top in the mid-2000s.

Don't worry about soul-crushing commutes, homeless encampments or rapidly rising taxes: asset bubbles make everything bearable, until they pop.

You deserve a realistic account of the economy you're joining. Here's reality: the vast majority of the gains reaped since your birth have flowed to the very top of the hyper-financialized wealth-power pyramid.

As Bucky Fuller noted in his famous dictum, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."

Rather than fight a system designed to stripmine you for life, seek a model for your life that obsoletes all the perverse conventional "solutions."

I'm putting four books on sale which may help provide an alternative context for your life-decisions.

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50% discount on An Unconventional Guide to Investing in Troubled Times

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22% discount on Inequality and the Collapse of Privilege and Why Our Status Quo Failed and Is Beyond Reform

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SUMMER BOOK SALE through June 30, 2018

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition.

Read the first section for free in PDF format.