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The Dollar Dilemma: Where to From Here? 

The Dollar Dilemma: Where to From Here?  | Breaking News from S.E.R.C.E |

"Be aware, that anyone who promotes a cashless society is not a friend to freedom of choice in monetary affairs. I’m hoping that blockchain technology will not be a tool that advocates of the “value added tax” can use to enhance the power of the state to collect taxes. Technology experts will need to deal with this concern and reassure us or find an answer to prevent it."

Do open the link to read the full article!  

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Argentina's Peso Collapse Is a Warning Sign 

Argentina's Peso Collapse Is a Warning Sign  | Breaking News from S.E.R.C.E |
The recent collapse of the Argentine Peso and other emerging currencies is more than a warning sign.

It could be the arrival of a “sudden stop”. As I explain in Escape from the Central Bank Trap (BEP, 2017), a sudden stop happens when the extraordinary and excessive flow of cheap US dollars into emerging markets suddenly reverses and funds return to the U.S. looking for safer assets. The central bank “carry trade” of low interest rates and abundant liquidity was used to buy “growth” and “inflation-linked” assets in emerging markets. As the evidence of a global slowdown adds to the rising rates in the U.S. and the Fed’s QT (quantitative tightening), emerging markets lose the tsunami of inflows and face massive outflows, because the bubble period was not used to strengthen those countries’ economies, but to perpetuate their imbalances.

The Argentine Peso, at the close of this article, lost 17% annualized is one of the most devalued currencies in 2018. More than the Lira of Turkey or the Ruble of Russia.

What explains this drop?

For some time now, many of us have warned of the mistake of massively increasing money supply and using high liquidity to avoid much-needed structural reforms. In Argentina, the government of Cristina Fernández de Kirchner left a monetary hole close to 20% of GDP and massive inflation after years of trying to cover structural imbalances with increases in the money supply greater than 30-35% per year.

Unfortunately, as in other emerging markets, the urgent reforms were abandoned, and an alternative formula was tried. Issue great quantities of debt and continue financing a growing public spending with central bank money printing expecting economic growth and cheap debt would offset the growing fiscal and monetary hole.

This wrongly-called “soft adjustment” was justified because of the enormous liquidity in international markets and appetite for emerging markets’ debt driven by consensus estimates of a continued weakening of the US dollar. Many Latin American and emerging market economies fell into the trap. Now, when it stops, and the US dollar recovers some of its weakness, it is devastating.

High fiscal and trade deficits financed by short-term dollar inflows become time bombs.

Argentina even issued a one-hundred-year bond at a spectacularly low rate (8.25%) with a very high demand, more than 3.5 times bid-to-cover. That $ 2.5 billion issuance seemed crazy. A one-hundred-year bond from a nation that has defaulted at least six times in the previous hundred years! Worse of all, those funds were used to finance current expenditure in local currency.

The extraordinary demand for bonds and other assets in Argentina or Turkey was justified by expectations of reforms and a change that, as time passed, simply did not happen. Countries failed to control inflation, deliver lower than expected growth and imbalances soared just as the U.S. started to see some inflation, rates started to rise. Suddenly, the yield spread between the U.S. 10-year bond and emerging markets debt was unattractive, and liquidity dried up faster than the speed of light even with a modest decrease of the Federal Reserve balance sheet. Liquidity disappears because of extremely leveraged bets on one single trade – a weaker dollar, higher global growth- unwind.

However, another problem exacerbates the reaction. An aggressive increase in the monetary base by the Argentine central bank made inflation rise above 23%.

With an increase in the monetary base of 28% per year, and seeking to finance excess spending by printing money and raising debt to “buy time”, the seeds of the disaster were planted. Excess liquidity and the US dollar weakness stopped. Local currencies and external funding face risk of collapse.

The Sudden Stop. When most of the emerging economies entered into twin deficits -trade and fiscal deficits- and consensus praised “synchronized growth”, they were sealing their destiny: When the US dollar regains some strength, US rates rise due to an increase in inflation, the flow of cheap money to emerging markets is reversed. Synchronized indebted growth created the risk of synchronized collapse.

The worrying thing about Argentina and many other economies is that they should have learned from this after decades of similar episodes. But investment bankers and policymakers always say “this time is different”. It was not.

Now Argentina has pushed interest rates to 40% to stop the bleeding. With rampant inflation and economic growth concerns, the Peso bounce is likely to be short-lived.

Massive money supply growth does not buy time or disguise structural problems. It simply destroys the purchasing power of the currency and reduces the country’s ability to attract investment and grow.

This is a warning, and administrations should take this episode as a serious signal before the scare turns into a widespread emerging market crisis.

Structural imbalances are not mitigated by carrying out the same monetary policies that led countries to crisis and discredit.

Over the next three years, the International Monetary Fund estimates that flows to emerging economies will fall by up to $60 billion per annum, equivalent to 25% of the flows received between 2010 and 2017.

This warning has started with the weakest currencies, those were monetary imbalances were largest. But others should not feel relieved. This warning should not be used to delay the inevitable reforms, but to accelerate them. Unfortunately, it looks like policymakers will prefer to blame any external factor except their disastrous monetary and fiscal policies.
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On Donald Trump's "Madness" & A New Gold Standard

On Donald Trump's "Madness" & A New Gold Standard | Breaking News from S.E.R.C.E |
Way back in 1995, when Mexico was in the throes of another financial crisis, I figured out the problem of the existing world's monetary system, based on the paper dollar as the fundamental currency of the world.

In my ignorance, I did not know that a man named Triffin had already pointed out that problem, which became known as "Triffin's Dilemma".

The problem is really very simple:

If the dollar - such as it is - is going to be the basis of the world's monetary system, and therefore required by all Central Banks as Reserves, there is only one way that these CBs can obtain those Reserves: their countries are forced to undersell all US producers, in order to be able to sell more to the US, than they buy from the US. The difference between the dollars they get from sales, is more, than the dollars they spend to buy from the US. That difference - known as the US Trade Deficit - flows to the CBs of the world and swells their Reserves.

So if Mr. Trump wants to cut down, or even ideally abolish the Trade Deficit, that would mean that foreign CBs would have to find it much harder to obtain dollars for their Reserves. Mr. Trump apparently does not want to have foreign CBs use dollars as Reserves, by making it very difficult to obtain those dollars - which they can only get if the US runs a Trade Deficit.

What that great world monetary system based on the paper dollar has done to the US, was quite unexpected: it consists in obtaining foreign goods by tendering paper money in payment, something that is fundamentally fraudulent. And that fraud has come back to haunt the US, quite unexpectedly.

The unexpected result of Triffin's (or "Hugo's") Dilemma, has been the de-industrialization of the US, as the world geared up to undersell all US producers wherever they could do so, in order to obtain the indispensable US Dollars.

Mr. Trump is wildly alienating all the rest of the world, with the threat of Tariffs in order to reduce the Trade Deficit. What he does not understand, is that the Trade Deficit is built-in to the US economy, because the world´s CBs need Dollars for their Reserves: that is the System.

There is one way, and only one way, to do away with the Trade Deficit and renew the productivity of the US: abandon  the present International Monetary System (derived from the original Bretton Woods Agreements of 1944) and return to the gold standard.

There are no "Trade Deficits" under the Gold Standard, because all countries have to pay Cash Gold for their imports, and collect Cash Gold for their exports. Result: Balanced Trade. No Trade Deficits.

A question in the back of my mind: Is Mr. Trump's "madness" really leading to the Gold Standard? Is that what he really wants? Because if he continues to undermine the present US Dollar as the World's Reserve Currency, by making it impossible for CBs to obtain Dollars through the US Trade Deficit, that would appear to be the likely final outcome.
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Consumers Stubbornly Cling to Cash, after Multiple IT Fiascos & Payment Systems Outages

Consumers Stubbornly Cling to Cash, after Multiple IT Fiascos & Payment Systems Outages | Breaking News from S.E.R.C.E |
The last month has been an unhappy time for daydreamers of a cashless nirvana. Following weeks of disruptive tech failures, payment outages, and escalating cyber fraud scams, much of it taking place in Britain, consumers have been reminded of one of the great benefits of physical cash: it is accepted just about everywhere and does not suddenly fail on you.

The findings of a new study by UK-based online payments company Paysafe, partly owned by US private equity giant Blackstone, confirm that consumers on both sides of the Atlantic continue to cling to physical lucre.

For its Lost in Transaction report, Paysafe surveyed over 5,000 consumers in the UK, Canada, the US, Germany, and Austria on their payment habits. One of its main findings is that 87% of consumers used cash to make purchases in the last month, while 83% visited ATMs, and 41% are not interested in even hearing about cash alternatives.

“Despite the apparent benefits of low-friction payment technologies, these findings suggest many consumers aren’t ready to lose visibility of the payment process,” says Paysafe Group Chief Marketing Officer Oscar Nieboer. “It’s clear that the benefits are not unilaterally agreed upon, with cultural and infrastructure trends at play, and it may be some time before adoption is widespread.”

Although consumers continue to cling to cash, they appear to be carrying less of it: 49% overall in the survey and 55% of U.S. respondents said they carry less cash now than they did a year ago. The average American consumer carries $42 today — that’s $8 less than in 2017. In the UK the average amount carried in 2017 was £33; that has now fallen to £21.

But that does not mean that the amount of cash in circulation is dwindling. On the contrary, according to this year’s G4S cash report, the world average ratio of currency vs GDP continues to rise, reaching 9.6% in 2018. “Currency in Circulation vs. GDP is increasing on all continents, indicating a consistent, growing demand for cash across the world,” says the report. South America has by far the highest cash dependency relative to its GDP, with an average ratio of over 16%.

The study also reveals that in 17 out of 24 advanced economies studied, cash represents more than 50% of all payment transactions. Data drawn from the ECB’s Diary Study shows that in Europe cash represents 79% of all transactions in volume and 54% in value.

That’s not to say that alternative payment methods — debit and credit cards and other forms of electronic payment — are not growing in use. In the UK contactless shopping is the most popular payment alternative, with 54% of consumers using it in the last month – compared to just 3% of US shoppers. It was largely thanks to this predilection for contactless cards, coupled with the reduced use of cash, that UK consumers were much more severely affected by the recent 12-hour outage of visa payment services in Western Europe.

Most consumers are still loath to use so-called “frictionless” payments — i.e. invisible transactions that take place ‘behind the scenes’ in apps — for in-store purchases. While 50% of respondents to the Paysafe survey said they had used a digital wallet such as Skrill or NETELLER for online purchases, just 9% of them currently use one for shopping in-store. Only 23% of consumers reported using frictionless payments in apps such as Uber, while 65% think voice-activated systems are not secure.

The two biggest concerns consumers have with mobile payments are privacy and fraud. “Closer examination of the reasons for this low and slow adoption of frictionless payments shows that, once again, fraud is the most widely mentioned barrier, cited by 50% of respondents,” the study said. “But data security is also a major concern, expressed by 48% of respondents.”

Given the number of recent scares, it’s a justifiable concern. Shoppers in Canada and the UK, two of the world’s most cashless economies, reported a rise in fraud in 2017, of 7% and 6% respectively. It’s a reminder that the more consumers come to rely on technological solutions in the payment sphere, the more exposed they become to the attentions of highly sophisticated cyber criminals.

In Mexico, a haven for the black market of stolen data, reports of data theft have mushroomed by 25% last year, yet the country’s government and banks are determined to plow ahead with plans to harvest — and store — the biometric data of all bank customers.

A recent survey from international law firm Osborne Clarke showed that 79% of the 2,000 people surveyed said they worry they would be sharing too much data if cash were entirely replaced by mobile payments. Respondents to the Paysafe survey also expressed concerns about being charged for things they didn’t buy (47%), losing control of their spending (31%), or making inadvertent purchases (28%).

The message is clear: for the moment, most consumers are unwilling to accept a wholly cashless economy. And their reservations may have grown in recent weeks, following the outage of Visa services in Europe, which left millions of customers across the region unable to make payments using their cards. In a statement, Visa said the problem was caused by a “hardware failure”, which hardly inspires confidence it could never happen again.

Until a cashless system can be created that is 100% safe from the threats posed by natural disasters, accidents, cyber criminals and basic human incompetence, consumers in most countries, including even less-cash economies like Sweden, the UK and Canada, would prefer to hold on to their grubby notes and coins. 
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Bitcoin Price Manipulation Versus What’s Going on in Dark Pools

Bitcoin Price Manipulation Versus What’s Going on in Dark Pools | Breaking News from S.E.R.C.E |
Finance Professor John Griffin and fellow researcher Amin Shams, both at the University of Texas, released a study yesterday that is causing alarm bells to ring for investors in Bitcoin and other digital currencies. Titled “Is Bitcoin Really Un-Tethered?” the researchers found strong evidence that Tether, another digital currency, is being used to artificially support the price of Bitcoin when it comes under selling pressure. Griffin and Shams found further that “Tether seems to be used both to stabilize and manipulate Bitcoin prices.”

Bitcoin soared over 1400 percent last year but has been selling off this year. It’s lost about 70 percent from the peak it set last year.

The researchers write:
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Hallmark of an Economic Ponzi Scheme

Hallmark of an Economic Ponzi Scheme | Breaking News from S.E.R.C.E |

Consider two economic systems.

In one, consumers work for employers to produce products and services. The employees are paid wages and salaries, and business owners earn profits. They use much of that income to purchase the goods and services produced by the economy. They save the remainder. A certain portion of the output represents “investment” goods, which are not consumed, and the portion of income not used for consumption – what we call “saving” – is used to directly or indirectly purchase those investment goods.

There may be some goods that are produced and are not purchased, in which case they become unintended “inventory investment,” but in a general sense, this first economic system is a well-functioning illustration of what we call “circular flow” or “general equilibrium.” As is always the case in the end, income equals expenditure, savings equal investment, and output is absorbed either as consumption or investment.

The second economic system is dysfunctional. Consumers work for employers to produce goods and services, but because of past labor market slack, weak bargaining power, and other factors, they are paid meaningfully less than they actually need to meet their consumption plans. The government also runs massive deficits, partly to supplement the income and medical needs of the public, partly to purchase goods and services from corporations, and partly to directly benefit corporations by cutting taxes on profits (despite being the only country in the OECD where corporations pay no value-added tax).

Meanwhile, lopsided corporate profits generate a great deal of saving for individuals at high incomes, who use these savings to finance government and household deficits through loans. This creation of new debt is required so the economy’s output can actually be absorbed. Businesses also use much of their profits to repurchase their own shares, and engage in what amounts, in aggregate, to a massive debt-for-equity swap with public shareholders: through a series of transactions, corporations issue debt to buy back their shares, and investors use the proceeds from selling those shares, directly or indirectly, but by necessity in equilibrium, to purchase the newly issued corporate debt.

The first of these economic systems is self-sustaining: income from productive activity is used to purchase the output of that productive activity in a circular flow. Debt is used primarily as a means to intermediate the savings of individuals to others who use it to finance productive investment.

The second of these economic systems is effectively a Ponzi scheme: the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy. Notably, since securities are assets to the holder and liabilities to the issuer, the growing mountain of debt does not represent “wealth” in aggregate. Rather, securities are the evidence of claims and obligations between different individuals in society, created each time funds are intermediated.

So it’s not just debt burdens that expand. Debt ownership also expands, and the debt deteriorates toward progressively lower quality. The dysfunctional economic system provides the illusion of prosperity for some segments of the economy. But in the end, the underlying instability will, as always, be expressed in the form of mass defaults, which effectively re-align the enormous volume of debt with the ability to service those obligations over the long-term.

This is where we find ourselves, once again.

If you examine financial history, you’ll see how this basic narrative has unfolded time and time again, and is repeated largely because of what Galbraith called “the extreme brevity of the financial memory.” Debt-financed prosperity is typically abetted by central banks that encourage consumers and speculators to borrow (the demand side of Ponzi finance) and also encourage yield-seeking demand among investors for newly-issued debt securities that offer a “pickup” in yield (the supply side of Ponzi finance). The heavy issuance of low-grade debt, and the progressive deterioration in credit quality, ultimately combine to produce a debt crisis, and losses follow that wipe out an enormous amount of accumulated saving and securities value. The strains on the income distribution are partially relieved by borrowers defaulting on their obligations, and bondholders receiving less than they expected.

The hallmark of an economic Ponzi scheme is that the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy.

Recall how this dynamic played out during the mortgage bubble and the collapse that followed. After the 2000-2002 recession, the Federal Reserve lowered short-term interest rates to 1%, and investors began seeking out securities that would offer them a “pickup” in yield over safe Treasury securities. They found that alternative in mortgage debt, which up to that time had never encountered a crisis, and was considered to be of the highest investment grade. In response to that yield-seeking demand, Wall Street responded by creating more “product” in the form of mortgage securities. To keep yields relatively high, mortgage loans were made to borrowers of lower and lower credit quality, eventually resulting in interest-only, no-doc, and sub-prime loans. The illusory prosperity of rising prices created the impression that the underlying loans were safe, which extended the speculation, and worsened the subsequent crisis.

Why this time feels different
The current speculative episode has recapitulated many of these features, but it’s tempting to imagine that this time is different. It’s not obvious why this belief persists. Certainly, the equity market valuations we observed at the recent highs weren’t wholly unprecedented – on the most reliable measures, the market reached nearly identical valuations at the 1929 and 2000 pre-crash extremes. Likewise, the extreme speculation in low-grade debt securities is not unprecedented. We saw the same behavior at the peak of the housing bubble in 2006-2007. The duration of this advancing half-cycle has been quite extended, of course, but so was the advance from 1990-2000 and from 1921 to 1929.

My sense is that part of what makes present risks so easy to dismiss is that observers familiar with financial history saw the seeds of yet another emerging bubble years ago, yet the bubble unfolded anyway. Nobody learned anything from the global financial crisis. Indeed, the protections enacted after the crisis are presently being dismantled. Extreme “overvalued, overbought, overbullish” market conditions – which closely preceded the 1987, 2000-2002, and 2007-2009 collapses (and contributed to my own success in market cycles prior to 2009) emerged years ago, encouraging my own early and incorrect warnings about impending risk. Our reliance on those syndromes left us crying wolf for quite some time.

In response, many investors have concluded that all apparent risks can be dismissed. This conclusion will likely prove to be fatal, because it implicitly assumes that if one measure proves unreliable (specifically, those “overvalued, overbought, overbullish” syndromes), then no measure is reliable. Yet aside from the difficulty with those overextended syndromes, other measures (specifically, the combination of valuations and market internals) would have not only captured the bubble advances of recent decades, but would have also anticipated and navigated the subsequent collapses of 2000-2002 and 2007-2009. I expect the same to be true of the collapse that will likely complete the current cycle.

One should remember that my own reputation on that front was rather spectacular in complete market cycles prior to the recent speculative half-cycle. So it’s essential to understand exactly what has been different in the period since 2009, and how we’ve adapted.

Emphatically, historically reliable valuation measures have not become any less useful. Valuations provide enormous information about long-term (10-12 year) returns and potential downside risk over the completion of a given market cycle, but they are often completely useless over shorter segments of the cycle. There is nothing new in this.

Likewise, the uniformity or divergence of market action across a wide range of securities, sectors, industries, and security-types provides enormously useful information about the inclination of investors toward speculation or risk-aversion. Indeed, the entire total return of the S&P 500 over the past decade has occurred in periods where our measures of market internals have been favorable. In contrast, the S&P 500 has lost value, on average, in periods when market internals have been unfavorable, with an interim loss during those periods deeper than -50%. Internals are vastly more useful, in my view, than simple trend-following measures such as 200-day moving averages. There is nothing new in this.

The speculative episode of recent years differed from past cycles only in one feature. In prior market cycles across history, there was always a point when enough was enough. Specifically, extreme syndromes of “overvalued, overbought, overbullish” market action were regularly followed, in short order, by air-pockets, panics, or outright collapses. In the face of the Federal Reserve’s zero interest rate experiment, investors continued to speculate well after those extremes repeatedly emerged. This half-cycle was different in that there was no definable limit to the speculation of investors. One had to wait until market internals deteriorated explicitly, indicating a shift in investor psychology from speculation to risk-aversion, before adopting a negative market outlook.

Understand that point, or nearly two thirds of your paper wealth in stocks, by our estimates, will likely be wiped out over the completion of this market cycle.

One of the outcomes of stress-testing our market risk/return classification methods against Depression-era data in 2009 (after a market collapse that we fully anticipated) was that the resulting methods prioritized “overvalued, overbought, overbullish” features of market action ahead of the condition of market internals. In prior market cycles across history, those syndromes typically emerged just before, or hand-in-hand with deterioration in market internals. Quantitative easing and zero-interest rate policy disrupted that overlap. It was detrimental, in recent years, to adopt a negative market outlook in response to extreme “overvalued, overbought, overbullish” features of market action, as one could have successfully done in prior market cycles across history. That was our Achilles Heel in the face of Fed-induced yield-seeking speculation.

Once interest rates hit zero, there was simply no such thing as “too extreme.” Indeed, as long as one imagined that there was any limit at all to speculation, no incremental adaptation was enough. For our part, we finally threw our hands up late last year and imposed the requirement that market internals must deteriorate explicitly in order to adopt a negative outlook. No exceptions.

The lesson to be learned from quantitative easing, zero-interest rate policy, and the bubble advance of recent years is simple: one must accept that there is no limit at all to the myopic speculation and self-interested amnesia of Wall Street. Bubbles and crashes will repeat again and again, and nothing will be learned from them. However, that does not mean abandoning the information from valuations or market internals. It means refraining from a negative market outlook, even amid extreme valuations and reckless speculation, until dispersion and divergences emerge in market internals (signaling a shift in investor psychology from speculation to risk-aversion). A neutral outlook is fine if conditions are sufficiently overextended, but defer a negative market outlook until market internals deteriorate.

Learn that lesson with us, and you’ll be better prepared not only to navigate future bubbles, but also to avoid being lulled into complacency when the combination of extreme valuations and deteriorating market internals opens up a trap door to subsequent collapse.

This half-cycle was different in that there was no definable limit to the speculation of investors. One had to wait until market internals deteriorated explicitly, indicating a shift in investor psychology from speculation to risk-aversion, before adopting a negative market outlook.

Prioritizing market internals ahead of “overvalued, overbought, overbullish” syndromes addresses the difficulty we encountered in this cycle, yet also preserves the considerations that effectively allowed us to anticipate the 2000-2002 and 2007-2009 collapses.

When extreme valuations are joined by deteriorating market internals (what we used to call “trend uniformity”), downside pressures can increase enormously. Recall my discussion of these considerations in October 2000:

“The information contained in earnings, balance sheets and economic releases is only a fraction of what is known by others. The action of prices and trading volume reveals other important information that traders are willing to back with real money. This is why trend uniformity is so crucial to our Market Climate approach. Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash than after one. Valuations, trend uniformity, and yield pressures are now uniformly unfavorable, and the market faces extreme risk in this environment.”

I emphasized the same considerations in August 2007, just before the global financial crisis:

“Remember, valuation often has little impact on short-term returns (though the impact can be quite violent once internal market action deteriorates, indicating that investors are becoming averse to risk). Still, valuations have an enormous impact on long-term returns, particularly at the horizon of 7 years and beyond. The recent market advance should do nothing to undermine the confidence that investors have in historically reliable, theoretically sound, carefully constructed measures of market valuation. Indeed, there is no evidence that historically reliable valuation measures have lost their validity. Though the stock market has maintained relatively high multiples since the late-1990’s, those multiples have thus far been associated with poor extended returns. Specifically, based on the most recent, reasonably long-term period available, the S&P 500 has (predictably) lagged Treasury bills for not just seven years, but now more than eight-and-a-half years. Investors will place themselves in quite a bit of danger if they believe that the ‘echo bubble’ from the 2002 lows is some sort of new era for valuations.”

It’s very easy to forget that by the 2009 low, investors in the S&P 500 had lost nearly 50%, including dividends, over the preceding 9 years, and had underperformed Treasury bills for nearly 14 years. Yet on the valuation measures we find best correlated with actual subsequent S&P 500 total returns, recent valuation extremes rival or exceed those of 1929 and 2000.

The lesson to be learned from quantitative easing, zero-interest rate policy, and the bubble advance of recent years is simple: one must accept that there is no limit at all to the myopic speculation and self-interested amnesia of Wall Street. Bubbles and crashes will repeat again and again, and nothing will be learned from them.

However, that does not mean abandoning the information from valuations or market internals. It means refraining from a negative market outlook, even amid extreme valuations and reckless speculation, until dispersion and divergences emerge in market internals. A neutral outlook is fine if conditions are sufficiently overextended, but defer a negative market outlook until market internals deteriorate.

At present, our measures of market internals remain unfavorable, as they have been since the week of February 2, and our most reliable measures of valuation remain at offensive extremes. If market internals improve, we’ll immediately adopt a neutral outlook (or possibly even constructive with a strong safety net). Here and now, however, we remain alert that there is an open trap door, in a market that I fully to expect to reach 1100 or lower on the S&P 500 over the completion of this cycle, and to post negative total returns over the coming 12-year horizon.

Remember how market cycles work. There is a durable component to gains, and a transitory component. The durable component is generally represented by gains that take the market up toward reliable historical valuation norms (the green line on the chart below). The transitory component is generally represented by gains that take the market beyond those norms. Based on the measures we find most reliable across history, we presently estimate the threshold between durable and transient to be roughly the 1100 level on the S&P 500, a threshold that we expect to advance by only about 4% annually in the years ahead. Most bear market declines breach those valuation norms, and the ones that don’t (1966, 2002) see those norms breached in a subsequent cycle. We have no expectation that the completion of the current market cycle will be different.

The Ponzi Economy

Let’s return to the concept of a dysfunctional economy, where consumption is largely financed by accumulating debt liabilities to supplement inadequate wages and salaries, where government runs massive fiscal deficits, not only to support the income shortfalls of its citizens, but increasingly to serve and enhance corporate profits themselves, and where corporations enjoy lopsided profits with which they further leverage the economy by engaging in a massive swap of equity with debt.

This setup would be an interesting theoretical study in risk and disequilibrium were it not for the fact that this is actually the situation that presently exists in the U.S. economy.

The chart below shows wages and salaries as a share of GDP. This share reached a record low in late-2011, at the same point that U.S. corporate profits peaked as a share of GDP. That extreme was initially followed by a rebound, but the share has slipped again in the past couple of years.

With the unemployment rate falling to just 3.8% in the May report, inflation in weekly average earnings has pushed up to 3%, and is likely to outpace general price inflation in the coming quarters. Meanwhile, amid the optimism of a 3.8% unemployment rate (matching the rate observed at the 2000 market peak), investors appear to ignore the implication that this has for economic growth. The fact is that nearly half of the economic growth we’ve observed in the U.S. economy in this recovery has been driven by a reduction in the unemployment rate. The red line below shows how the underlying “structural” growth rate of the U.S. economy has slowed in recent decades.

Based on population and demographic factors, even if the unemployment rate remains at 3.8% in 2024, employment growth will contribute just 0.6% annually to GDP growth, leaving productivity growth (averaging well below 1% annually in the recovery since 2010) to contribute the balance. Without the cyclical contribution of a falling unemployment rate, real U.S. economic growth is likely to slow to well-below 2% annually, and even that assumes the economy will avoid a recession in the years ahead.

Wage inflation has been quite limited in the aftermath of job losses during the global financial crisis. Given a tightening labor market, an acceleration of wage gains will be good news for employees, but the delay has contributed to quite a few distortions in the interim.

One clear distortion is that profit margins have been higher and more resilient in this cycle than in prior economic cycles. Again, this elevation of profit margins is a mirror image of slack labor markets and weak growth in wages and salaries. The relationship isn’t perfect, as a result of quarter-to-quarter volatility, but the inverse relationship between the two is clear.

A good way to understand the relationship between wages and profits is to think in terms of unit labor costs. Consider a generic unit of output. The revenue of generic output is measured by the economy-wide GDP price deflator. The cost of employment embedded into that output is measured by unit labor cost (ULC). Accordingly, we would expect profit margins to increase when unit labor costs rise slower than the GDP deflator, and we would expect profit margins to fall when unit labor costs rise faster than the GDP deflator. That’s exactly what we observe in the data.

The same relationship can be observed in the way that profits increase and decrease over the economic cycle.

Now remember how we talked about the “circular flow” of the economy? One consequence of equilibrium, which has to hold even in a dysfunctional economy, is that income is equal to expenditure (remember, we’re including investment, and even unintended inventory accumulation), and savings are equal to investment.

When U.S. corporate profits are unusually high, it’s typically an indication that households and the government are cutting their savings and going into debt.

In an open economy like ours, we can measure not only savings by households and the government, but also the amount of savings that foreigners send to the economy by purchasing securities from us. As it happens, that “inflow” of foreign savings is the mirror image of our current account deficit, because if we don’t pay for our imports by sending foreigners goods and services, it turns out that we pay for them by sending them securities. Because the “balance of payments” always sums to zero, whenever we export securities to foreigners, on balance, we also run a trade deficit. Since real investment in factories, capital goods, and housing has to be financed by savings, you’ll also find that our trade deficit regularly “deteriorates” during U.S. investment booms, and “improves” during recessions.

So here’s an interesting way to think about corporate profits: since gross domestic investment has to be financed by total savings (household, government, foreign, corporate), and because fluctuations in gross domestic investment are largely financed by fluctuations in foreign capital inflows, we would expect corporate profits to be high when the sum of household and government savings is low. Indeed, that’s exactly what we find. [Geek’s note: basically, if dI = dH + dG + dF + dC, and dI ~ dF, then dC ~ -(dH+dG)]

Put simply, when U.S. corporate profits are unusually high, it’s typically an indication that households and the government are cutting their savings and going into debt. Combine this with the fact that corporate profits move inversely to wage and salary income, and it should be evident that the surface prosperity of the U.S. economy masks a Ponzi dynamic underneath. Specifically, corporations are highly profitable precisely because wage and salary growth was deeply depressed by the labor market slack that followed the global financial crisis. In the interim, households have bridged the gap by going increasingly into debt, while government deficits have also increased, both to provide income (and health care) support, and to benefit corporations directly.

Record corporate profits are essentially the upside-down, mirror image of a dysfunctional economy going into extreme indebtedness.

The chart below shows personal saving as a share of GDP. At present, saving is at the lowest level since the “equity extraction” bonanza that accompanied the housing bubble. Only in this instance, the low rate of saving largely reflects depressed incomes rather than extravagant consumption.

In a Ponzi economy, the gap between income and consumption has to be bridged by increasing levels of debt. The chart below illustrates this dynamic. Total federal public debt now stands at 106% of GDP, and about 77% of GDP if one excludes the Social Security trust fund and other intragovernmental debt. Both figures are the highest in history. Not surprisingly, consumer credit as a share of wage and salary income has also pushed to the highest level in history.

To put the U.S. federal debt into perspective, only 12 countries have higher ratios of gross government debt to GDP, the largest being Japan, Greece, Italy, and Singapore. The only reason we aren’t as vulnerable to credit strains as say, Italy or Greece, is that those peripheral European countries do not have their own independent central banks and therefore have no “printing press” to backstop their promises. Rather, the European Central Bank can only buy the debt of individual member countries in proportion to their size, unless those countries submit to full austerity plans. That’s why we continue to monitor European banks, many which carry the same level of gross leverage today as U.S. banks prior to the global financial crisis. The most leveraged among them is Deutsche Bank (DB), which plunged to a record low last week, and is particularly worth watching.

Despite record profits, high debt issuance has also infected corporate balance sheets, as companies lever themselves up by repurchasing their own shares. The chart below shows median ratio of debt to revenue among S&P 500 components, as well as the median ratios sorted by quartile. The chart is presented on log scale, with each division showing a doubling in debt/revenue (thanks to our resident math guru Russell Jackson for compiling this data). In recent years, corporate debt has advanced to the highest fraction of revenues in history, nearly tripling from 1985 levels across every quartile.

Moody’s observed last week that since 2009, the number of global nonfinancial companies rated as speculative or junk has surged by 58%, to the highest proportion in history. Despite the low rate of defaults at present, Moody’s warns that future periods of economic stress will cause a “particularly large” wave of defaults (h/t Lisa Abramowicz, Jeff Cox).

Without the cyclical contribution of a falling unemployment rate, real U.S. economic growth is likely to slow to well-below 2% annually, and even that assumes the economy will avoid a recession in the years ahead.

The expansion of junk and near-junk credit has again extended to commercial mortgage bonds, where interest-only loans now account for over 75% of the underlying debt. Bloomberg notes that “as investors have flocked to debt investments that seem safe, underwriters have been emboldened to make the instruments riskier and keep yields relatively high by removing or watering down protections.”

Similar deterioration is evident in the $1 trillion market for leveraged loans (loans to already heavily indebted borrowers), where “covenant lite” loans, which offer fewer protections to lenders in the event of default, now account for 77% of loans. Leveraged loans are catching up to the U.S. high-yield market, which accounts for another $1.2 trillion in debt.

Meanwhile, the median corporate credit rating has dropped to BBB- according to S&P Global. That’s just one notch above high yield, speculative-grade junk. Oaktree Capital (where Howard Marks is Co-Chair), told Bloomberg last week that it expects “a flood of troubled credits topping $1 trillion. The supply of low quality debt is significantly higher than prior periods, while the lack of covenant protections makes investing in shaky creditors riskier than ever. Those flows could mean debt will fall into distress quickly.”

The bottom line is that the combination of wildly experimental monetary policy and subdued growth in wages and salaries in the recovery from the global financial crisis has contributed to a dysfunctional equilibrium, with massive increases in debt burdens at the government, household, and corporate level. The quality of this debt has progressively weakened, both because of lighter covenants and underwriting standards, and because of a more general deterioration in credit ratings and servicing capacity.

Low household savings and growing consumer debt, born of depressed wage and salary compensation, have contributed to temporarily elevated profit margins that investors have treated as permanent. Corporations, enticed by low interest rates, have engaged in a massive leveraged buy-out of stocks, partly to offset dilution from stock grants to executives, and apparently in the misguided belief that valuations and subsequent market returns are unrelated. Equity valuations, on the most reliable measures, rival or exceed those observed at the 1929 and 2000 market extremes. By our estimates, stocks are likely to substantially underperform Treasury bond yields in the coming 10-12 years. Emphatically, valuation extremes cannot be “justified” by low interest rates, because when interest rates are low because growth rates are also low, no valuation premium is “justified” at all.

Amid these risks, I’ll emphasize again that our immediate, near-term outlook would become much more neutral (or even constructive with a strong safety net) if an improvement in market internals was to indicate fresh speculative psychology among investors. Still, further speculation would only make the completion of this cycle even worse.

The hallmark of an economic Ponzi scheme is that the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy. The debt burdens, speculation, and skewed valuations most responsible for today’s lopsided prosperity are exactly the seeds from which the next crisis will spring.

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The Mises Institute's Case for Optimism

The Mises Institute's Case for Optimism | Breaking News from S.E.R.C.E |
Mises never tired of telling his students and readers that trends can change. What makes them change are the choices we make, the values we hold, the ideas we advance, the institutions we support...Unlike Mises, we do not face obstacles that appear hopelessly high. We owe it to his memory to throw ourselves completely into the intellectual struggle to make liberty not just a hope, but a reality in our times. As we do, let us all adopt as our motto the words Mises returned to again and again in his life. "Do not give in to evil, but proceed ever more boldly against it." — Lew Rockwell (1998)
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This is What Privilege Looks Like

This is What Privilege Looks Like | Breaking News from S.E.R.C.E |

Imagine a form of almost magic money, one that everyone around the world needs and thus wants more of. Imagine that money being held in large quantities by central banks and commercial banks all around the world, and also lent out as the default denomination for most debt instruments. Imagine that money being used almost exclusively by governments, businesses, and individuals across the globe when buying oil and settling international transactions. 

Imagine that money being issued at the whim of one government's central bank and Treasury, yet used and accepted in exchange for real goods and services worldwide. Imagine that same government being able to wildly overspend, borrow money, and pay it back at exceedingly low interest rates--again using money it alone produces. 

And finally imagine a political arrangement that perpetuates it all, created against the backdrop of an emergent postwar order led by a dominant new military and nuclear superpower? 

We might call that entire arrangement "privilege," which is exactly what every American paid in US dollars (and holding assets denominated in US dollars) enjoys even today.

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The Final Phase of Desperation

The Final Phase of Desperation | Breaking News from S.E.R.C.E |
Short-term and long-term trends can provide invaluable information while validating previous theories and conclusions.  The patient and competent analyst or researcher can use the passage of time to build confidence and strength in theories which may have been questioned or dismissed as unrealistic. This is the place where we now find ourselves.

There have been a lot of events occurring over the last few months which I haven’t written about or weaved back into the overall POM (Philosophy of Metrics) thesis and narrative.  There are various reasons for that with the most relevant one being around the need to allow the trends to develop at an organic pace. Caution should be used to not allow too much time to pass without closing certain loops because the thesis will fragment and drift apart if not nurtured and referenced.

From the onset of POM the thesis has been built around the expansion of multilateralism across the worlds geopolitical, monetary, and cultural spheres.  The core of the thesis contained a series of instrumental changes which would cause a transformation of the existing unipolar world centered around the international use of the USD and the benefits this arrangement provided to a select group of banking, industrial, military, academic, and political interests which stretched across the borders of western nations, such as America, Great Britain, the European Union, and to a smaller extent some Middle Eastern nations, such as Saudi Arabia and Israel.
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Learning from America’s Forgotten Default

Learning from America’s Forgotten Default | Breaking News from S.E.R.C.E |

One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. There’s just one problem: it’s not true, and while few people remember the "gold clause cases" of the 1930s, that episode holds valuable lessons for leaders today.

LOS ANGELES – One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. Every time the debt ceiling is debated in Congress, politicians and journalists dust off a common trope: the US doesn’t stiff its creditors.

There’s just one problem: it’s not true. There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively. And, while few people remember this critical period in economic history, it holds valuable lessons for leaders today.

In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar. But this would not be as easy as FDR calculated. Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.” These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge.

For FDR, however, the gold clause was an obstacle to devaluation. If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt.

To solve this problem, Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts. The door was opened for devaluation – and for a political fight. Republicans were dismayed that the country’s reputation was being put at risk, while the Roosevelt administration argued that the resolution didn’t amount to “a repudiation of contracts.”

On January 30, 1934, the dollar was officially devalued. The price of gold went from $20.67 an ounce – a price in effect since 1834 – to $35 an ounce. Not surprisingly, those holding securities protected by the gold clause claimed that the abrogation was unconstitutional. Lawsuits were filed, and four of them eventually reached the Supreme Court; in January 1935, justices heard two cases that referred to private debts, and two concerning government obligations.

On February 18, 1935, the Supreme Court announced its decisions. In each case, justices ruled 5-4 in favor of the government – and against investors seeking compensation. According to the majority opinion, the Roosevelt administration could invoke “necessity” as a justification for annulling contracts if it would help free the economy from the Great Depression.

Justice James Clark McReynolds, a southern lawyer who was US Attorney General during President Woodrow Wilson’s first term, wrote the dissenting opinion – one for all four cases. In a brief speech, he talked about the sanctity of contracts, government obligations, and repudiation under the guise of law. He ended his presentation with strong words: “Shame and humiliation are upon us now. Moral and financial chaos may be confidently expected.”

Most Americans have forgotten this episode, as collective amnesia has papered over an event that contradicts the image of a country where the rule of law prevails and contracts are sacred.

But good lawyers still remember it; today, the 1935 ruling is invoked when attorneys are defending countries in default (like Venezuela). And, as more governments face down new debt-related dangers – such as unfunded liabilities associated with pension and health-care obligations – we may see the argument surface even more frequently.

According to recent estimates, the US government’s unfunded liabilities are a staggering 260% of GDP – and that does not include conventional federal debt and unfunded state and local government liabilities. Nor is this a problem only for America; in many countries, pension and health-related liabilities are increasing, while the ability to cover them is diminishing.

A key question, then, is whether governments seeking to adjust contracts retroactively may once again invoke the legal argument of “necessity.” The 1933 abrogation of the gold clause provides abundant legal and economic reasons to consider this possibility. The US Supreme Court agreed with the “necessity” argument once before. It is not far-fetched to think that it may happen again.

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Is There a Difference Between Economic Power and Political Power? 

Is There a Difference Between Economic Power and Political Power?  | Breaking News from S.E.R.C.E |
The term capitalism is highly confusing. The definition is clear enough: the private ownership of the means of production (capital). But the implications are very different depending on one's political or economic perspective. Both are right and wrong. Let's take a look at them.

Politically speaking, private ownership of the means of production provides owners with power. Why?

Because society is dependent on the production of value, and production is undertaken using capital. Whoever has ownership of capital can then influence society. Consequently, it is only intuitive that owners of immense capital can make demands from policy-makers, who need to at least consider this perspective when making new laws.

So the power of the state (usually thought of as the power of "the people") is in a sense limited by capital ownership. And, no doubt, policy-makers feel that their power is to some extent circumscribed by the influence of capital owners. (Whether this is a good or bad thing is a different issue.) So there's a constant scratching of each other's backs between the state and capital owners, as should be expected. Both want it their way, and the state's apparatus (and the state's means, to refer to Oppenheimer) only allows for one way. So no wonder capital owners and politicians are both cooperating and covering their own behinds.

In other words, politically capitalism is about power because capital ownership implies influence over the political process and capital owners are, in fact, invited to take part in policy-making by political decision-makers. They both gain from such wheeling and dealing.

Economically speaking, this analysis makes little sense. Why?
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This Is A Really Strange Development

This Is A Really Strange Development | Breaking News from S.E.R.C.E |
Observing the eurodollar system as I’ve done for so many years, you have to be prepared for curve balls thrown at you. Just when you think you’ve got it clocked (sometimes literally), something changes and it all gets tossed out the window.

About a month ago, the Federal Reserve reported a sharp drop of UST’s in custody on behalf of foreign agents. I noted then, and remain convinced now, that was something like a collateral call. It happened the week of April 18.

Not surprisingly, the same data shows over subsequent weeks the amount of UST’s in custody continued to decline sharply. The four-week total (through the week of May 9, the latest available) is about -$66 billion. That’s an enormous drop, a level in the same class as other episodes where global liquidity problems were obvious.
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Central Bankers Won't Tolerate Deflation — No Matter the Cost

Central Bankers Won't Tolerate Deflation — No Matter the Cost | Breaking News from S.E.R.C.E |
It is hardly surprising that with equity indices stalling, the financial community is increasingly worried that the long, steady bull market is coming to an end. Naturally, this makes investors look for reasons to worry, and it turns out that there are indeed many things to worry about.

In fact, there are always things to worry about. Ever since the Lehman crisis, the Four Horsemen of the Apocalypse have been casting long shadows across the financial stage. But as financial assets have continued to rise in value over the last nine years, bearish fund managers, spooked by systemic risks of one sort or another and the perennial threat of a renewed slump, have been forced to discard their ursine views.

As often as not, it is not much more than a question of emphasis. There is always good news and bad news. As an investor, you semi-consciously choose what to believe.

There are causes for concern, of that there is no doubt. Mostly, they arise from the consequences of earlier state interventions on the money side. Governments are slowly strangling private sector production with increasingly rapacious demands on taxpayers and have been resorting to the printing press to finance the shortfalls. In reality, there is a finite limit to government spending, because it impoverishes the tax base. Yet governments, with very few exceptions, seek to conceal this truism by increasing spending and budget deficits even more. In this, President Trump is not alone.

Bankruptcy is the end result. And don’t believe the old saw about how governments can’t go bust. They can, and they do by destroying their currencies, as von Mises implied in the quote above. The naïve inflationists referred to by Mises justify their stance by believing that inflation is invigorating, and deflation is devastating. Any and all statistics pointing to a slowdown in the growth of money supply or in the economy is therefore taken to be a forewarning of deflation.

Inflationists are simply recycling Irving Fisher’s debt-deflation theory, which is no longer relevant. Fisher held that in an economic crisis, bad debts forced banks to liquidate collateral, pushing down collateral values. And as previously sound loans lose their collateral cover, banks are forced to liquidate those as well.

But it is no longer the case. Central banks have removed the discipline of gold, so they can intervene to prevent financial and economic crises, rather than let them run their destructive courses. They have fully embraced inflationism, giving them the excuse for monetary and credit expansion as a cure-all.

Therefore, when the next crisis occurs, central banks will take steps to ensure that in aggregate the quantity of money does not contract. It is the one forecast we can make with absolute certainty. And every time a crisis happens it takes more monetary heft to get out of it. But that’s not an issue for a central bank with two overriding objectives, not the targeting of inflation and unemployment as such, but to ensure a recession never happens, and to finance, through money-printing if necessary, escalating government spending.

Minor Wobbles Are not the Credit Crisis
We must discriminate between the momentary problems faced by central banks and the inevitable crisis at the end of the credit cycle. Dealing with problems as they arise has become routine, the justification for continual inflationism. The credit crisis is a different matter. Central bankers do not seem to realize it, but the credit crisis is their own creation, the way markets eventually unwind the distortions created by earlier monetary policy. So long as central banks suppress interest rates and expand money and credit, there will be periodic credit crises to follow.
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What Is Cultural Marxism?

What Is Cultural Marxism? | Breaking News from S.E.R.C.E |
The term “cultural Marxism” has gained traction in recent years, usually employed pejoratively against young leftists and Social Justice Warrior ideologues. Like any such political pejorative, including those used by both the left and the right, the common rejoinder is that, by the overuse of the term, it has either been rendered meaningless or has always been without meaning.

But “cultural Marxism” is a term that has real meaning, and not necessarily a pejorative meaning (that would presumably depend on your own ideological preferences). The idea of cultural Marxism is derived from Marx’s theory of history as it evolved through the discipline of history by Marxist historians as they gradually became less orthodox.

The Marxist Theory of History
The original Marxist theory of history consisted of a few assumptions. The first is that the history of any society could be divided into three epochs: the ancient society, the feudal society, and the capitalist society. This was Marx’s unique idea of a “stages theory of history,” though stage doctrines of history were hardly new. The pre-Marxian Christian philosophy of history, for example, offered a similar pattern of stages from the epoch of sinless bliss, to that of wicked suffering, and finally, Christian salvation.

But the Christian philosophy of history moved under the invisible direction of a “Prime Mover”: God. Marx’s theory of history also contains an invisible Prime Mover: the ambiguously named “material forces of production.” What, specifically, these material forces of production actually are depends on the epoch. In feudal times, of course, it was land. In the capitalist epoch, it would be manufactories, or the capital goods that specifically replaced the feudal serf with the capitalist wage-laborer.

This leads to the second major element of Marx’s theory of history: class consciousness. Marx believed that each societal epoch contained internal contradictions that would progressively divide the different “classes” of people. In feudal times, this would be the serf and the landlord. Under capitalism, of course, Marx divided people into the proletariat and the bourgeoisie. The internal contradictions would lead to a conflict between classes known as the “class struggle,” and eventually, the lower class would overthrow society and usher in the subsequent stage. This is Marx’s famous class analysis.

The third and final major element of Marx’s theory of history was a determinist theory, positing that the movement of society from one stage to its successor stage was inevitable, and through this inevitability, the fourth and final epoch would eventually be ushered in by the proletariat’s overthrow of the bourgeoisie. Of course, this final stage was socialism (as I have detailed elsewhere , Marx did not originally make any distinction between socialism and communism, and this alteration to his theory of history was made by Vladimir Lenin and Joseph Stalin).

The deterministic outlook on history was not unique to Marx, either. As Mises points out in Theory and History , this deterministic idea was borrowed from and combined with the Enlightenment view of human progress.

The Enlightenment thinkers believed that as society progressed, human reason would inevitably yield an upward linear progression of history – being that each era of human history would be inevitably better than the period that preceded it. The Enlightenment determinism was necessarily optimistic, and Marx embraced their idea and combined it with his own stages doctrine. Thus, by accepting both the optimistic Enlightenment theory of human progress and Marx’s stages doctrine, Marx could argue, without any need to substantiate his claims, that the inevitable stage of socialism would be consequently better than the capitalist stage that preceded it, on the sole merit that it came later.

Marx’s criticisms of the “bourgeoisie economists” reveal his dedication to his theory in dismissing his opponents by charging that the classical economists were governed by their own class consciousness, and therefore their economic arguments should be dismissed without consideration. The only proof that anybody needed that socialism was the superior economic system was to accept that it was the historically inevitable economic system.

In brief summation, Marx’s theory of history consisted of (1) a stages doctrine (2) class consciousness, dictated by a “prime mover,” and (3) an optimistic version of historical determinism. The term “dialectical materialism” that refers to Marx’s theory of history is derived from the “materialistic” aspect of the “prime mover” contained in Marx’s “material forces of production,” and the “dialectical” aspect of the inner contradictions that plague each stage of society.

The Marxist Historians
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Forget the Human Rights Council, Why Not Leave the Entire UN?

Forget the Human Rights Council, Why Not Leave the Entire UN? | Breaking News from S.E.R.C.E |

The Trump Administration recently announced that the US will withdraw from the United Nations Human Rights Council. Their justification is that the council consists of human rights violators, such as Cuba, China, and Venezuela, and has demonstrated a bias against Israel.

UN Ambassador Nikki Haley took to the pages of the Wall Street Journal to further expand on the decision, writing:

After more than a year of unsuccessful efforts to fix these fundamental defects, the U.S. delegation announced Tuesday our withdrawal from the council. Our country will no longer be party to this deeply flawed institution, which harms the cause of human rights more than it helps it....

In the end, our allies’ case for the U.S. to stay on the council was actually the most compelling argument to leave. They said American participation was the last shred of credibility left in the organization. But a stamp of legitimacy on the current Human Rights Council is precisely what the U.S. should not provide.

Of course the exact same logic could be used to advocate the United States from pulling out of the UN entirely.

The UN’s website outlines the five core missions for the organization. These include:

Maintain International Peace and Security
Protect Human Rights
Deliver Humanitarian Aid
Promote Sustainable Development
Uphold International Law

Its failure to maintain international peace and security is obvious, though obviously the United States raising that objection would open America to deserved ridicule. The failure of the United Nations, however, to restrain fifteen years of US militarism points to the inherent weakness of the organization.

The disastrous human rights record of the UN also goes deeper than the criticism of the HRC. While, again, it’s not surprising for the US government being hesitant in raising particular objections, in recent years the UN has witnessed member countries resurrect widespread torture programs and help foster an active slave market in Libya.

As Lucy Wescott wrote in Newsweek, international human rights organizations have been vocal in questionining the usefulness of the UN:

The U.N. remains vulnerable after a number of governments have stopped it from preventing mass atrocities, including wars in Syria and Yemen. Syria is an example of “a systematic failure of the U.N. to fulfill its vital role in upholding rights and international law and ensuring accountability,” according to the report.

“[The U.N. is] certainly an organization that is creaking at the seams, that was designed for the 20th century,” Richard Bennett, head of Amnesty International’s U.N. office, tells Newsweek. “ There are questions about whether it’s fit for purpose in the 21st century.”

While the UN does manage to carry out some humanitarian aid missions, these too are plagued with expected problems of a vast international bureaucracy. The organization’s own estimates place the rate of fraud at 30%, but even those numbers understate the bleak reality that the biggest winners of the UN’s programs tend to be government officials who are the most to blame for international poverty.

William Easterly, co-director of New York University’s Development Research Institute, has written on how the United Nation's humanitarian model gets everything wrong:

[The UN swoops] into third-world countries and offer purely technical assistance to dictatorships like Uganda or Ethiopia on how to solve poverty.

Unfortunately, dictators’ sole motivation is to stay in power. So the development experts may get some roads built, but they are not maintained. Experts may sink boreholes for clean water, but the wells break down. Individuals do not have the political rights to protest disastrous public services, so they never improve. Meanwhile, dictators are left with cash and services to prop themselves up–while punishing their enemies.

This same top down approach underscores the failures of the UN’s “sustainable development” objective as well. Unsurprisingly, the inherent fallacies of economic central planners don’t vanish when executed by a vast international organization. Instead, we have bad economic policy, usually backed by Malthusian fearmongering, empowering globalist bureaucrats who aspire to one day be able to impose direct taxes on sovereign countries.

For those reasons and more, Trump should do what he does best and disrupt the status quo by pulling the US out of the UN and evict the organization from New York City. Then, if he wants to actually succeed where the UN has failed, he’d find a way to make his truly free trade zone happen. After all, nothing is better for peace, development or human rights as the wonders of international trade.

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BIS Blasts Cryptos in Special Report: "Beyond the Hype"

BIS Blasts Cryptos in Special Report: "Beyond the Hype" | Breaking News from S.E.R.C.E |
The BIS blasts cryptos over scaling issues, energy, and trust. The BIS is correct. Cryptos are fatally flawed as money.

A Bank of International Settlements (BIS) report examines cryptocurrencies in depth. The study, called "Looking Beyond the Hype" investigates whether cryptocurrencies could play any role as money.

Bloomberg, Reuters, and the Bitcoin Exchange guide all have articles on the report but not one of the bothered to link to it.

After a bit of digging, I found the crypto report is part of an upcoming BIS annual report. The BIS pre-released the crypto report today (as chapter 5).

Here's a link to the page that contains a download for two Pre-Released BIS Chapters, one of them is on cryptos. I provide some snips below.

Note: I start with some lengthy snips that explain in detail how blockchain works.

Cryptocurrencies: Looking Beyond the Hype
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Texas Bullion Depository Open for Business

Texas Bullion Depository Open for Business | Breaking News from S.E.R.C.E |
The Texas Bullion Depository officially opened for business this week. The creation of the facility represents a power-shift away from the federal government, and sets the foundation to undermine the Federal Reserve’s monopoly on money.

In June 2015, Gov. Greg Abbot signed legislation creating the state gold bullion and precious metal depository. The facility will not only provide a secure place for individuals, business, cities, counties, government agencies and even other countries to store gold and other precious metals, the law also creates a mechanism to facilitate the everyday use of gold and silver in transactions. In short, a person will eventually be able to deposit gold or silver – and pay other people through electronic means or checks – in sound money.

The facility began accepting deposits of precious metals on Wednesday, June 6. Texas Comptroller Glenn Hegar became the first depositor. He praised the depository as a secure place to store gold and silver.

“Once you’ve made that deposit, it is going to be there tomorrow and in the future, until you make a decision to withdraw it or you want to sell it,” he told the Texas Tribune.

Rep. Giovanni Capriglione sponsored the legislaiton creating the depository. He also deposited gold on Wednesday. He said he thinks the Texas facility could be the first of many across the U.S.

“I can’t think of any place else in the world that could create a bullion depository this way, and I’ve heard from legislators across the country who want to do what we are doing, from Tennessee to Utah,” he said in a statement. “We will see a lot of financial interest in this depository, with gold, silver and other commodities coming here.”

Austin-based Lone Star Tangible Assets runs the depository for the state. It currently operates it out of its existing facility in Austin, but plans to open a new building for the depository in Leander sometime in 2019.

You don’t have to be a Texas resident to use the depository. Any U.S. citizen can set up an account online and then ship or personally deliver metal to the facility. The Texas Bullion Depository will accept gold, silver, platinum, rhodium and palladium.

The depository does not currently have a system in place to faciliate everyday transactions with gold and silver, but that remains part of the long-term plan.

According to an article in the Star-Telegram, state officials want a facility “with an e-commerce component that also provides for secure physical storage for Bullion.” While in the development phase, officials said plans for a depository will include online services that would let customers accept, transfer and withdraw bullion deposits and related fees.

Ultimately, depositors will be able to use a bullion-funded debit card that seamlessly converts gold and silver to fiat currency in the background. This will enable them to make instant purchases wherever credit and debit cards are accepted.

By making gold and silver available for regular, daily transactions by the general public, the new depository has the potential for wide-reaching effect. Professor William Greene is an expert on constitutional tender and said in a paper for the Mises Institute that when people in multiple states actually start using gold and silver instead of Federal Reserve notes, it would effectively nullify the Federal Reserve and end the federal government’s monopoly on money.
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The Dangers of Trump's G7 Trade Gamble | Mises Wire

The Dangers of Trump's G7 Trade Gamble | Mises Wire | Breaking News from S.E.R.C.E |
The list of countries with the largest trade surplus with the United States is led by China, which exports $375 billion more than it imports. It is followed, distantly, by Mexico ($ 71 bn), Japan (69 bn), Germany (65 bn), Vietnam (38 bn), Ireland (38 bn) and Italy (31 bn). If we do the exercise of putting aside the 2018 report of the USTR (Office of the US Trade Representative 2018 National Trade Estimate), the markets that have the more protectionist measures against the United States are China, the European Union, Japan, Mexico and India. What a surprise.

These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron or any of the leaders gathered there.

During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess … to the United States.

Steel and aluminum, like the automobile industry, are clear examples of building unnecessary capacity and subsidizing it, country by country, hoping that it will be somebody else who closes its inefficient factories while, at the same time, hoping to export more.

Meanwhile, barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The United States’ complaints in the World Trade Organization fell on deaf ears.

And then Trump arrived. The requirement of the Trump administration in the G7 to eliminate all tariffs and barriers, rejected by the rest, has shown that the hat trick of accusing the US of protectionism was simply a PR stunt. Every time the Trump administration has pressed its trading partners with tariffs, we learned of hidden barriers from the so-called “free trade leaders” in China and the European Union. In six months we have seen an important list of tariffs and barriers against the United States that many of us simply thought did not exist.

Trump’s strategy is obvious. He tries to dismantle the trick of imposing hidden barriers inside, with a smile, and at the same time try to export more to the United States.

The German car manufacturers themselves have asked the European Union to reduce tariffs on US cars, the Chinese have agreed to reduce barriers to the imports of US agricultural and industrial products, and so on. Even the European Union recognized that the “Made In China 2025” plan, which the United States denounced, was a conscious objective of limiting foreign trade.

It had to explode. If all countries subsidize their excess capacity and try to export to the United States while using peregrine excuses to limit imports from the world leader, it ends up breaking the deck.
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Video: Wall Street and Central Bank Collusion

Video: Wall Street and Central Bank Collusion | Breaking News from S.E.R.C.E |
Nomi Prins is a Wall Street veteran and expert on central bank mischief. Her books All The President's Bankers: The Hidden Alliances that Drive American Power and Collusion: How Central Bankers Rigged the World detail the cronyism and secret dealing of central banks, making the case against unchecked power in the hands of an elite class of bankers and their revolving-door clients at the Treasury and Fed. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
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Is Anyone Really Surprised DB’s Problems Had Nothing To Do With The DoJ Fine?

Is Anyone Really Surprised DB’s Problems Had Nothing To Do With The DoJ Fine? | Breaking News from S.E.R.C.E |
You need only go back a little less than two years for an example. In later 2016, Deutsche Bank was a huge problem everyone was discussing if only because they couldn’t avoid it. Despite “reflation” then gripping much of the world, the German institution stood out for all the wrong reasons.

Those were easily dismissed as nothing other than an impending fine for housing bubble era wrongdoing. The US Department of Justice was going to slam the bank with an enormous penalty and its potential size was supposedly the reason investors were getting nervous. Rumors were swirling that it could be more than $10 billion, perhaps $14 or $15 billion. At that level the bank’s capital stance would be severely threatened (and might trigger coco’s and such).

In January 2017, Deutsche settled for $7.2 billion. It would pay $3.1 billion in civil penalties (under FIRREA) while also covering $4.1 billion in “relief” to various affected parties (such as homeowners). A serious forfeit, but nowhere near as much as had been feared.

After falling below $13 per share (on the NYSE) in September 2016, DB’s stock rose as prospects for a reduced settlement gained in perception. By the time it was announced, the stock had recovered to more than $20. End of story?

Not quite. As I wrote in September 2016:

While attention is rightly focused on Deutsche Bank it is only so because the bank is the most visible symptom being the most vulnerable participant in this “something.” DB is just an outbreak so prominent that the mainstream can no longer pretend there is nothing worth reporting – but they can still obscure why that might be, focusing on the canard about the DOJ settlement. This is a systemic issue, one that is as plain as Deutsche’s stock price.

That’s ultimately what’s important to understand here. The DOJ issue was as residual seasonality, 2a7 money market reform, and everything else. Media attention starts from the premise that everything is good and great, and never deviates from it. Therefore, whenever something comes along that challenges the narrative there is an intense, often desperate search to explain it as something other than it is.

It doesn’t matter if it reaches into the bizarre or absurd, so long as whatever can sound plausible ends up looking benign. DB was in trouble because of long ago transgressions that have nothing to do with its current capabilities and certainly cannot sully the outlook of the awesome future the world’s genius technocrats have laid out for everyone. It always sounds legit, which is the point. 

But it is not true. It never is. I’m not claiming Deutsche is the next Lehman, either; they aren’t. That’s the other side to this issue, those who immediately go to the other extreme.

The bank’s struggles are real and they are, in fact, systemic in nature. DB isn’t alone in that regard, but, as I wrote in 2016, they sit at the more visible end of the spectrum. News broke recently that their US operations were secretly placed on a Federal Reserve watchlist. The irony of all this is beyond tragic, since the bank finds itself in this situation because it had followed too closely the overall macro narrative developed by that very central bank.

I wrote a few weeks ago that what got them into so much trouble the last few years was they did what Ben Bernanke and Janet Yellen proposed they do. They believed in the recovery and committed to it.

Recall early 2014. The Fed had already started to taper its final two QE’s and expected that economic risks were shifting in the economy’s favor; so much that central bankers began to think about not just their exit but one fraught by potential overheating. The very thing they talk about today they near shouted about four years ago…

But DB wasn’t just buying junk bonds or leveraged loans and storing them in inventory. They were no investment fund, they were seeking to reclaim at least some part of the past pre-2007 glory. They were going all in on US junk money dealing, the FICC parts that allowed the explosion of leveraged loans all around Houston and beyond.

Today, the bank’s press release contains all the words and reassurances that contrarily conjure up all the wrong sorts of ideas. It says the bank is “very well capitalized” and “has significant liquidity reserves”, the very things you are forced to say when people really start to question your capitalization and liquidity reserves.

Only this time in May 2018 it can’t have anything whatsoever to do with the Department of Justice. Not that it did two years ago, either. It never is what they say. The truth is much simpler, and more depressing. We’ve never recovered from 2008. Some banks learned long ago the full range of what that means, still the hard way, while others are being subjected to the hard lessons of modern credit-based money.

It’s hard to believe now but in May 2007 DB’s stock was trading for more than $150 per share. It did so on the premise that eurodollar banks were valuable franchises (in the 2009 words of Ben Bernanke). The stock has lost almost 90% of its value over the last eleven years not because of civil fines, money market reform, or Dodd-Frank regulation (or whatever anyone in the mainstream might dream up next to “explain” why it can’t be a broken money system), rather the global system irreparably changed on August 9, 2007. There are consequences to that for Deutsche Bank still to explore, and those are very much related to those for the global economy as a whole. 
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John Oliver is Wrong About Venezuela — It's a Socialist Country

John Oliver is Wrong About Venezuela — It's a Socialist Country | Breaking News from S.E.R.C.E |
Like any leftist analysis of Venezuela’s economic disaster, Oliver’s segment completely misses the mark.

To rationalize Venezuela’s catastrophic state, Oliver engaged in a series of mental gymnastics that could easily qualify him for the 2020 Olympics. This entire episode was an empty display of leftist journalism hiding behind the guise of comedy.

And, sadly, it was filled with many of the same excuses socialist apologists use to rationalize the failures of their nasty experiments.

Yet Again, We're Indulging in the "No True Scotsman" Fallacy
Starting at 2:46, Oliver asserts that there are “Plenty of socialist countries that look nothing like Venezuela.”

What countries is he actually be referring to?

North Korea and Cuba? Some of the most durable communist regimes in the modern era, and possible scenarios that Venezuela will face if it continues along this economically destructive path.

Or is he referring to the supposedly socialist Scandinavian countries? The same countries featuring mixed economies that originally became wealthy through capitalism before the welfare state came along.

Vague in details and actual research, Oliver starts off by avoiding any direct discussion of socialism’s horrid track record.

But that’s to be expected from leftist intellectuals that quickly dismisses any blatant case of socialist failure as “not true socialism”.

The No True Scotsman Fallacy has just entered the building.

The Mismanagement Cop-Out
In the same vein, Oliver downplays the Venezuelan crisis by claiming it’s not a question about socialism but rather a case of “epic mismanagement”.

A convenient excuse to explain away the natural consequences of central planning, Oliver fails to recognize that mismanagement is an inherent feature of socialism.

Venezuela’s notorious shortage crisis is the result of a country with no functioning market to freely determine prices. Oliver at least acknowledges the negative impact of price controls at 9:07, but he embellishes this with the claim that Venezuela’s price controls “were unrealistic”.

Basic economics demonstrates that price controls are unrealistic by default.

Under a free market, consumers and producers use prices as signals to determine how much of a product must be demanded or supplied.

However, when price controls enter the equation, the entire price system is thrown out of whack. Artificially low prices incentivize consumers to demand more of a good than producers are able to supply. When demand exceeds supply, shortages emerge.

Make no mistake it about it, price controls are part and parcel of the socialist system.
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Such Fragility, Not Italy

Such Fragility, Not Italy | Breaking News from S.E.R.C.E |
It’s not quite yet on the level of October 15, 2014, but it’s not really that far off, either. What made the prior episode three and a half years ago unique was the condensed timeframe, as well as how far UST yields fell. Today has been a far steadier “flight to safety”, meaning the same thing just spread out over the entire session. Collateral.

And it’s worldwide. The UST 10s is as good as any other place to start. The benchmark bond’s yield opened from the Memorial Day holiday down a little more than 5 bps in yield from last Friday’s close. Beginning around 10:40 am ET, over the next two hours it would sink a further 8 bps, pause until just before 2:00 pm ET, and then drop another 6 bps before recovering just a tiny bit at the close.

From Friday, the 10s are more than 16 bps lower in yield. That’s not uncertainty, it’s a collateral call (fear).

More interesting, the specific trigger in the UST selloff appears to be JPY. It was moving higher (bad) from the Asian open last night. Starting off near 109.50, by Europe’s open it was already up to 108.50. JPY had recovered 109 again until around 10:00 am ET when it reversed and moved sharply higher all over. It didn’t quite manage to break back above 108, but it came close toward the end of trading.
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How Identity Politics Is Changing Universities

How Identity Politics Is Changing Universities | Breaking News from S.E.R.C.E |
Ours is a politicized age from the college campus to the corporate boardroom, a situation in which things that once were personal now are utterly political. The hard left now controls not only higher education, but also much of scientific research upon which the future of humanity as we know it depends. What began in 1969 as the establishment of a single course in Women’s Studies at Cornell University and similar courses elsewhere in what then were called Black Studies has metastasized into a monster that almost completely dominates higher education in the United States and Canada. Today, it is rare to find a college or university that does not have majors and programs in Identity Studies.

This long march of feminists and racialists from near-obscurity to absolute-dominance is compared to the rise of Snopes family created by author William Faulkner in his 1940 novel, The Hamlet. In Faulkner’s book, the Snopeses move into the Mississippi community of Frenchman’s Bend and slowly take over nearly all aspects of life. Even though the locals seem to understand what is taking place, they are seemingly helpless because they heard the rumor that people that made a Snopes unhappy would have their barns burned to the ground.

In campus politics, the activists did not threaten to burn only the barns but rather the entire college campus. Anyone in higher education that might allegedly say or write something that offends someone in a politically-protected group is likely to be the focus of the infamous Twitter Mob, and even a distinguished career and something as prestigious as a Nobel Prize offers no cover, as Tim Hunt found out. For that matter, truth itself is no defense, as we found out in the infamous Duke Lacrosse Case. All that matters is identity politics, and the Duke case demonstrates just how powerful – and destructive – such politics have become.

In March 2006 at Duke University, a black stripper falsely claimed that three members of the Duke men’s lacrosse team beat and raped her at a team party where she performed, and the Duke campus exploded in anger as the story spread throughout the country, dominating newscasts and the Internet. Shortly after the accusations surfaced, 88 Duke faculty members signed an advertisement in the Duke Chronicle, a student newspaper, condemning the lacrosse players and thanking demonstrators for not waiting to see if the charges were credible.

Some signatories, such as historian William Chafe (who publicly likened the alleged incident to the infamous 1955 murder of Emmett Till), were well-noted academically. However, most signees came from the humanities programs such as Women’s Studies and African-American Studies and had sparse publication resumes and certainly nothing to compare with the publications records of Duke faculty members in the sciences and fields such as economics. For example, Wahneema Lubiano, who still teaches literature and African-American Studies at Duke, has almost no publications, but has listed two forthcoming books for more than a decade. A faculty member with that kind of record in the sciences or the business disciplines long before would have been dismissed for lack of academic productivity, but Lubiano received tenure and promotion at one of the nation’s most elite universities.

This is beyond ironic. First, the rape charges clearly were false, but Duke University officials, journalists, and many others – including the local District Attorney, Michael Nifong, who brought the rape charges – refused even to consider the players’ innocence. Second, even though most of the signatories of the Chronicle advertisement were far less academically proficient than the rest of the Duke faculty, they dominated the campus discourse and cowed other more-accomplished faculty members into silence.
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Eurodollar University: Way Beyond Bank Reserves

Eurodollar University: Way Beyond Bank Reserves | Breaking News from S.E.R.C.E |
The Crash of ’87 was a big deal, though not in the way most people remember. It was a stock market event, obviously, and those are the terms under which it has been understood. That’s not really its legacy, however, as the major shifts that began with Black Monday have had little and most often nothing to do with stocks or share prices.

Alan Greenspan was new to the top job at the FOMC on October 19. He and his fellow policymakers were very much concerned a stock market crash might trigger something along the lines of 1929. They would think that because for them, operating under an expectations regime, it didn’t matter that money and shares had been divorced and separated for decades by then. The Fed in its moneyless modern incarnation worried about how people might feel about the market chaos, and then act on those feelings alone.

Wall Street itself was shaken, though not because of some pop psychology side experiment. The bull of the eighties was much more than Gordon Gekko. The BSD’s were all bond traders, not stock jockeys. It was the rise of the quants.

The stock crash was appreciated, then, as a very prominent, in-your-face example of “tail risk.” These extreme outcomes are applicable in all markets. Even the bond desks were sweating heavily in October 1987.

Some that weren’t were those like John Meriwether’s “young professors”, the experience at Salomon Brothers (Solly) as retold by Michael Lewis’ Liar’s Poker. These mathematicians actually foretold the future. And Solly wasn’t alone or unique.

In the aftermath of Black Monday, JP Morgan’s chairman Dennis Weatherstone began to demand a 4:15 update every trading day. He wanted to know just how much the whole “bank” might stand to lose in the next day’s trading based on everything that had happened up to and including the just-completed session. It was the forerunner of value-at-risk, or VaR.

Again, it wasn’t really about share prices or exposures to what was offered at the NYSE. JP Morgan wasn’t itself a stock trader so much as an investment bank exposed to price swings in other markets, those ostensibly called “fixed” income. FICC would often be anything but, and smaller price movements in these places could end your career – or your bank – in a hurry.

Wall Street took its demand to the Ivy League business schools where Economics curriculum had already been evolving toward statistics. Mathematicians would become prized recruits, even (especially) if they had graduated without ever discovering the difference between a bond and a stock. What happened in ’87 was the last push in the direction of complete monetary evolution.

It would achieve its full capacity around 1995 when JP Morgan began offering its mathematical services to the Street, and all over the rest of the growing eurodollar world. RiskMetrics was in huge demand because VaR and other statistical construction tools had become integral pieces of modern bank balance sheet construction.
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Millennial Candidates Embrace Socialism, while Venezuela Chokes on it

Millennial Candidates Embrace Socialism, while Venezuela Chokes on it | Breaking News from S.E.R.C.E |
Franklin Bynum was unchallenged and won the Democratic nomination to become a criminal court judge in Houston. Mr. Bynum is an avowed socialist and he’s not alone in that conservative state. At least 16 other socialists appeared on the ballot in primary races across Texas.

Socialism has oozed out of college classrooms and into the ballot box. “Yes, I’m running as a socialist,” Mr. Bynum told the New York Times. “I’m a far-left candidate. What I’m trying to do is be a Democrat who actually stands for something, and tells people, ‘Here’s how we are going to materially improve conditions in your life.’”

Wanna be Judge Bynum is a member of the Democratic Socialists of America (DSA), which is growing by leaps and bounds after Trump’s election, even in conservative states.

The NYT reports, “D.S.A.’s membership has increased from about 5,000 to 35,000 nationwide. The number of local groups has grown from 40 to 181, including 10 in Texas. Houston’s once-dormant chapter now has nearly 300 members.”

Texas, a hot bed for socialism? Who would have thunk it?

“We want to see money stop controlling everything. That includes politics,” said Amy Zachmeyer, 34, a union organizer who helped revive the moribund Houston DSA chapter. “That just resonates with millennials who are making less money than their parents did, are less able to buy a home and drowning in student debt.” 

Ms. Zachmeyer’s student loan payment burden of $1,000 a month convinced her to become a socialist. Good grief.

Don’t worry about a blue wave, worry about a red (commie) wave.

Unsurprisingly, the NYT recently featured an opinion piece by Jason Barker entitled, “Happy Birthday, Karl Marx. You Were Right!” Just a few paragraphs in, Associate Professor Barker gets off this doozy of a paragraph,

educated liberal opinion is today more or less unanimous in its agreement that Marx’s basic thesis — that capitalism is driven by a deeply divisive class struggle in which the ruling-class minority appropriates the surplus labor of the working-class majority as profit — is correct. Even liberal economists such as Nouriel Roubini agree that Marx’s conviction that capitalism has an inbuilt tendency to destroy itself remains as prescient as ever.

It gets better, while millennials struggle under the weight of student loan payments and underemployment, Barker writes,

The inroads that artificial intelligence is currently making into medical diagnosis and surgery, for instance, bears out the argument in the “Manifesto” that technology would greatly accelerate the “division of labor,” or the deskilling of such professions [doctors, lawyers, and well, all jobs].

The good philosophy professor then throws Black Lives Matter and the MeToo movement into the Marxist class struggle bucket.

Of course, accelerating the division of labor is a good thing. Jörg Guido Hülsmann explained,

The economic incentives springing from the division of labor explain the origin and nature of human societies. The basic economic laws that here come into play are therefore the starting point of [Ludwig von] Mises's entire social philosophy, just as it has been the starting point of the greatest social philosophers before him.

Professor Hülsmann continues,
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