Central banks are still pumping credit like mad hatters in Wonderland, but the only two places responding are those least connected to a web of “real” values.
Farmland can only be driven so high, since its discounted cash flows are based eventually on crop prices and those cannot long exceed people’s ability to buy food.
Commodities in general could be driven higher only as long as people could afford escalating food, heat and transportation costs, which no one in their right mind will borrow to pay for.
Home prices couldn’t be sustainably driven higher than the ability of those with flat-lining incomes to manage the escalating payments, especially once interest rates reached the near-zero limit.
What’s left?
Intangibles.
Stocks and bonds are the last asset baskets left, unless you count artwork and collectibles (which are also canaries in the inflation coal mine, reflecting the skyrocketing credit-inflation wealth of the uber-rich.)
The rich are getting richer because they are largely the ones who own the only stuff still responding to the Fed’s manic credit pumping. The rich buy the debt created when someone (often the political system) borrows the Fed’s created-from-nowhere credit and, now owning an IOU of the political system, they are “richer,” so they feel compelled to bid up the prices of other stuff they and their buddies own, like stocks, bonds and artwork.
This is by all measures incestuous and a Ponzi, but the rich don’t seem to know it. They all swap IOU’s among themselves and feel wealthier each time they and their buddies circle the Monopoly ™ game board.
What we’re witnessing is a confluence of massive trends reaching culmination. We are in the early stages of automation doing to manufacturing what it did to agriculture at the dawn of the Industrial Revolution. We have reached the apogee of political organization of society, the end stage of Progressivist philosophy (a kissing cousin of socialism, the other rationalization for putting all of human endeavor under the coercive control of politics.) We are witnesses to the demise of science as it turns into blind trust of political and/or celebrity “experts” whose power crushes innovation and knowledge that threatens their ivory towers.
All of these trends result in the masses of men being unable to “grow” anymore. Our monetary system, however, is defined by continuous compound inflation (used to rob producers/workers and lavish the loot on bankers and political plunderers) , but all the other trends have reversed.
The point is that while the Fed is using the “old ingredients” to generate “growth,” they are truly Cargo Cultists because the signal they measure was always a derivative of underlying economic changes, not their driver.
The reality is that the constructive economic trends of the last 150 years reached maturity while the destructive trends (nearly all political) grew to the point where their effects could no longer be masked. The former can’t keep raising living standards and the latter are a voracious parasite weakening what’s left of the former.
The final ramp in stock prices and bond values (i.e., low interest rates) is being climbed only by the uber-wealthy because theirs is the last cohort to realize the system has changed. The rest of us live in a world where limits are close enough to see at all times. For some, those limits are as close as missing a single paycheck, but for even the relatively well-off the limits are still visible.
It is only those who hold extreme wealth, who have no perception of reality at all, who continue to buy IOU’s that can’t be supported, count them as “wealth” and use that to rationalize ever higher prices for other intangible assets. They do this because only they can still embrace the narrative of compound growth when rising prices are unmistakably parabolic.
Murray Rothbard once opined that billionaires must all be crazy, because their minds are warped after being surrounded by sycophants and Yes-Men. All powerful people, including those managing the billions of others (Wall Street money managers) suffer the same problem. It is no wonder at all that these are the only people left who are delusional enough to keep driving the S&P500 higher.
We can’t understand their minds because we live in a world of limits that plainly falsifies the assumptions on which they act. For this reason we can’t honestly guess where or when the mirage they built will dissipate, but we do know that at some point even they will awaken and realize they’re not Alice and this isn’t Wonderland.
We’re interested spectators to the grandest pageant of Naked Emperors ever recorded.
I keep finding articles about how robots are the future and how great they are. No mention of the humans who will be out of work.
They will classify the robots as laborers, pass a minimum wage for them, and tax it at 100% since they are robots in no need of anything but some electricity and a squirt of oil now and then.
The rest of us can sit at home, talk to babes on facebook, watch football, games, and wait for our monthly checks from big brother. Not heaven perhaps but beats a 40 hour a week stint flipping hamburgers for minimum wage, or stacking shelves in WallMart.
When automation took over agriculture it was not clear that the sudden loss of that work was particularly good. The factories of the evolving Industrial Revolution were, by today’s standards, awful, but it sure beat the conditions on the farms of the time (and it beat starvation, too.)
Today, no one knows what people will do in coming decades.
The statists want to double down on the very political parasite that is killing us all. They want to institute “guaranteed incomes” for those who can’t find (or don’t try to find) a way to produce. This is a guarantee of speeding the de-civilization already underway.
Eventually, nature will win anyway. We can’t know the future, but nature is the least vicious of the alternatives; trying to stop time with politics will only make things worse…it cannot be otherwise.
If the benefits (lower and lower costs) of the robots came through, all would be reasonably well. The fact is, however, that the parasite class is already robbing us all of the benefits of the last 40 years of innovation.
Costs should have plunged, relative living standards should have risen. In some cases they did (cheap clothes, for instance) but in others, we were robbed BLIND.
There’s no way people should need to work 5 days a week (or more) to live now, yet that’s where we are. Those who lord it over us, and those fools who support them out of ignorance, are why.
“Commodities in general could be driven higher only as long as people could afford escalating food, heat and transportation costs, which no one in their right mind will borrow to pay for.”
———- from the article
People borrow to pay for food all the time …. putting their tab on credit cards when paying at the supermarket or going out to eat. Also, food in America can still go a LOT higher. Americans have one of the lowest expenditures on food (as a percentage of income) on the planet.
Unless I’m missing your point, people borrow to pay for transportation costs every single day. Zero percent financing! Not to mention buying gas on credit.
Minor quibbles for sure … or even misunderstanding on my part. Nice article and thank you for submitting it.
DC – thanks for the article.
Re costs/prices – generally speaking, real prices of goods have plunged across all sectors of manufactured goods. Relative living standards is a different kettle of fish, however. The reasons for falling living standards include an explosion in total taxes paid, extreme private and public debt levels, failure to make health care more efficient, and foreign competition.
What has hit living standards more than the price of goods is the price of services, and the overall tax take of governments of all levels. And by services I mean health care in particular, which is difficult to automate. Health care still relies on individual human interaction, and the cost of health care is also compounded by the ever increasing batteries of tests and procedures that are developed.
“In 1960 middle-income Americans paid less than 30 percent of their earnings in local, state, and federal taxes; today that figure is up to 40 percent.[1] Furthermore, many middle- and upper-income families living in the states that have the highest taxes, such as New York and California, pay nearly half their incomes in taxes. High taxes reflect the growth of government, at all levels, in the United States since World War II”
So, just based on TAXES, since 1960, Americans have lost 10/70 (in 1960 after tax dollars = 70 per hundred earned, and today it is 60 per hundred, so the change is 10/70) of their income to extra taxes – in other words, Americans have lost 14.3 % of their real income to extra taxes since 1960.
The impact taxes have made on the real income position of Americans cannot be understated. And when this is combined with the explosion in costs associated with services (health care) that cannot be automated, it is easy to see why Americans are struggling.
And combine this with the incessant pressure of low-wage foreign competition, falling educational outcomes, falling educational levels, every-increasing sense of entitlement, ever-increasing personal and private debt, etc., then the result is this:
The American middle class is FUCKED.
Llpoh, I agree totally that the parasitic class ramped their exactions amazingly in the last 50 years.
In addition, I suggest that medical services now have larded into them make-work programs by the tens of millions….all the myriad mouths to feed in the regulatory and “insurance” systems.
I also believe that medical services themselves are larded to the point of absurdity. An earlier (wordier) version of this piece went into examples of vast parasitism and waste, with one specific being CABG for asymptomatic people. I have personal experience (an In-law) who was in my mind victimized by this, and my work allows me access to other examples of where medical procedures that made no sense at all were not only done, but encouraged by the system of payments. We have too many medical services of the wrong kind, many of them encouraging hypochondria as I see it, and far too many people are even involved in their provision. Yes, it’s a service business but the state’s monopolization of it has amplified the folly 1000-fold.
We are drowning in economic friction and vampirism, right when talent is increasingly leveraged and leaving the less-talented in the dust.
Until this system sorts itself out over the next couple generations, there’s not going to be anywhere near the excess capacity for people to simply tolerate the friction and pillaging. The regulatory and confiscatory/redistributionist political systems are going to destroy us. I see little way to avoid it, but I’m willing to be wrong on this.
Sure crop prices can long exceed people’s ability to buy food – once production is not primarily for food to be sold. During the first phase of the English Enclosures of the Commons, wool displaced food as a cash crop, and during the last phase military purchases set the price level. These days, the margins are set by biofuel production. And so on.
DC Sunsets, the “factories of the evolving Industrial Revolution” did not “beat the conditions on the farms of the time”; mostly, people were put off the farms by things like the evictions of that last phase of the English Enclosures of the Commons I mentioned, and then they only had the choice between the factories (and mines) and starvation (in the first phase, they didn’t even have that). Whenever the farm choice remained, few chose the factories (e.g. Lord Lever couldn’t get crofters to go into his factory town at Leverburgh).
I agree with PM L – farms were preferable to the early hell-holes of factories. But it is a minor quibble.