11 Trillion Dollars in Stock Markets Wealth Was Wiped Out In the 3rd Quarter of 2015 - Michael Snyder

Yes, This Is Already a Global Financial Crisis

Did you know that 11 trillion dollars in global stock market wealth was wiped out during the third quarter of 2015? When I was emailed this figure by a friend, I was stunned for a moment. I knew that things were bad, but were they really this bad? When I first received this information, I had just finished a taping for a television show in which I had boldly declared that 5 trillion dollars of stock market wealth had been wiped out around the world. Unfortunately, the final number has turned out to be much larger than that. Over the past three months, the stock markets of all major global economies have been crashing simultaneously, and 11 trillion dollars of “paper wealth” has now completely vanished. The following comes from Fortune…

Global equity markets suffered a bruising third quarter, shedding $11 trillion worth of global shares over three months, according to Bloomberg. It was the market’s worst quarter since 2011. The prolonged slump was due to low prices for commodities such as oil, instability in China’s markets, and the anticipation that the U.S. Federal Reserve will soon raise interest rates.

In light of this number, how in the world is it possible that there is still anyone out there that is claiming that “nothing happened” over the past few months? In China, they sure aren’t claiming that “nothing happened”. Chinese stocks are down about 40 percent from the peak of the market. In Germany, they sure aren’t claiming that “nothing happened”. As of a few days ago a quarter of all German stock market wealth had been wiped out since the peak earlier this year. Yes, things have been a bit milder in the United States. So far, stocks are only down about 10 percent or so, but we did see some truly remarkable things happen over the past three months. We witnessed the 8th largest single day stock market crash on a point basis in U.S. history, we witnessed the 10th largest single day stock market crash in U.S. history, and we witnessed the single greatest intradaystock market crash in all of U.S. history. On August 24th the Dow plunged 1,089 points before bouncing back. But every time the markets have an up day there are all these people running around declaring that “the crash is over”. Well, that is not how financial markets work. They “stair-step” on the way up and they do the same thing on the way down. And without a doubt, U.S. stocks still have a long, long way to go down.

In recent years, stocks have soared to unbelievably unrealistic levels. One of the most popular methods of measuring the true value of stocks is something called the cyclically-adjusted price to earnings ratio. It was developed by economist Robert Shiller of Yale University, and it attempts to accurately show how much we are paying for stocks in relation to how much those corporations are actually earning. When this number is very high, stocks are overvalued, and when this number is very low stocks are undervalued.

Earlier this year, CAPE hit a peak of about 27, and by the beginning of August it was still sitting up around 26. The only times CAPE has been higher has been just before other stock market bubbles have been burst…

It would take a total drop of about 40 percent from the peak of the market just to get back to average. So far the Dow has fallen about 10 percent or so, so it is going to take another 30 percent crash just to get to a point where stock prices are considered “normal” once again. Another very common measurement of stock values shows the exact same thing. The ratio of corporate equities to GDP is also known as “the Buffett Indicator” because Warren Buffett loves it so much. When stock prices get very high in relation to the size of the overall economy that is a sign that stocks are overvalued, and when stock prices get very low in relation to the size of the overall economy that is a sign that stocks are undervalued. The chart below was recently posted by dshort.com and it shows that stock prices would have to fall more than 40 percent just to get back to the historical average (the mean).

Right now, lots of Americans are rushing to get back into the stock market because “September is over” and they figure that stocks are a good value now since they have gone down a good bit. But as you can clearly see from the charts that I have just shared, U.S. stocks are still a terrible value. Even if we don’t experience a “black swan event” like a major natural disaster, a large scale terror attack or the collapse of a globally important financial institution in the months ahead, it is inevitable that stocks will go down a lot more at some point. Stocks simply cannot defy gravity forever. These bubbles have always ended in crashes in the past, and the same thing is going to happen again this time. People that are trying to tell you that “things are different this time” simply refuse to learn from history.

I am writing this piece while waiting for a plane at Denver International Airport. I missed my connection because my first flight was delayed by about an hour. So I am just sitting here watching people walk past. Most of them are just living their lives without any idea of the disaster that is about to hit this country. Over the past few days I have been reflecting on the fact that our nation has willingly chosen this path. We willingly chose to go into so much debt. We willingly chose to send millions of good paying jobs overseas. We willingly chose to pump up these financial bubbles. We willingly chose to reject the values of our forefathers. We willingly chose men like Barack Obama, Harry Reid and John Boehner to represent us in Washington. The things that are coming are the logical consequences for decisions that we have collectively made as a nation. There are still many out there that do not believe that we will have to face any consequences for what we have done. Unfortunately for all of us, they are not going to have to wait very long at all to see how incredibly wrong they were.

Michael T. Snyder
Publisher of The Economic Collapse Blog
Author of The Beginning Of The End

THE IMPLICATIONS OF OFFSHORING

THE UNITED STATE ECONOMY

On January 6, 2004, Senator Charles Schumer and I challenged the erroneous idea that jobs offshoring was free trade in a New York Times op-ed. Our article so astounded economists that within a few days Schumer and I were summoned to a Brookings Institution conference in Washington, DC, to explain our heresy. In the nationally televised conference, I declared that the consequence of jobs offshoring would be that the US would be a Third World country in 20 years. That was 11 years ago, and the US is on course to descend to Third World status before the remaining nine years of my prediction have expired.

The evidence is everywhere. In September the US Bureau of the Census released its report on US household income by quintile. Every quintile, as well as the top 5%, has experienced a decline in real household income since their peaks. The bottom quintile (lower 20 percent) has had a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.

The Census Bureau uses official measures of inflation to arrive at real income. These measures are understated. If more accurate measures of inflation are used (such as those available from shadowstats.com), the declines in real household income are larger and have been declining for a longer period. Some measures show real median annual household income below levels of the late 1960s and early 1970s. Note that these declines have occurred during an alleged six-year economic recovery from 2009 to the current time, and during a period when the labor force was shrinking due to a sustained decline in the labor force participation rate. On April 3, 2015 the US Bureau of Labor Statistics announced that 93,175,000 Americans of working age are not in the work force, a historical record. Normally, an economic recovery is marked by a rise in the labor force participation rate. John Williams reports that when discouraged workers are included among the measure of the unemployed, the US unemployment rate is currently 23%, not the 5.2% reported figure. In a recently released report, the Social Security Administration provides annual income data on an individual basis. Are you ready for this? In 2014 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.

The scarcity of jobs and the low pay are direct consequences of jobs offshoring. Under pressure from “shareholder advocates” (Wall Street) and large retailers, US manufacturing companies moved their manufacturing abroad to countries where the rock bottom price of labor results in a rise in corporate profits, executive “performance bonuses,” and stock prices. The departure of well-paid US manufacturing jobs was soon followed by the departure of software engineering, IT, and other professional service jobs. Incompetent economic studies by careless economists, such as Michael Porter at Harvard and Matthew Slaughter at Dartmouth, concluded that the gift of vast numbers of US high productivity, high value-added jobs to foreign countries was a great benefit to the US economy. In articles and books I challenged this absurd conclusion, and all of the economic evidence proves that I am correct. The promised better jobs that the “New Economy” would create to replace the jobs gifted to foreigners have never appeared. Instead, the economy creates lowly-paid part-time jobs, such as waitresses, bartenders, retail clerks, and ambulatory health care services, while full-time jobs with benefits continue to shrink as a percentage of total jobs.

These part-time jobs do not provide enough income to form a household. Consequently, as a Federal Reserve study reports, “Nationally, nearly half of 25-year-olds lived with their parents in 2012-2013, up from just over 25% in 1999.” When half of 25-year olds cannot form households, the market for houses and home furnishings collapses. Finance is the only sector of the US economy that is growing. The financial industry’s share of GDP has risen from less than 4% in 1960 to about 8% today. As Michael Hudson has shown, finance is not a productive activity. It is a looting activity (Killing The

Host). Moreover, extraordinary financial concentration and reckless risk and debt leverage have made the financial sector a grave threat to the economy. The absence of growth in real consumer income means that there is no growth in aggregate demand to drive the economy. Consumer indebtedness limits the ability of consumers to expand their spending with credit. These spending limits on consumers mean that new investment has limited appeal to businesses. The economy simply cannot go anywhere, except down as businesses continue to lower their costs by substituting part-time jobs for full-time jobs and by substituting foreign for domestic workers. Government at every level is over-indebted, and quantitative easing has over-supplied the US currency.

This is not the end of the story. When manufacturing jobs depart, research, development, design, and innovation follow. An economy that doesn't make things does not innovate. The entire economy is lost, not merely the supply chains. The economic and social infrastructure is collapsing, including the family itself, the rule of law, and the accountability of government. When college graduates can’t find employment because their jobs have been off-shored or given to foreigners on work visas, the demand for college education declines. To become indebted only to find employment that cannot service student loans becomes a bad economic decision. We already have the situation where college and university administrations spend 75% of the university’s budget on themselves, hiring adjuncts to teach the classes for a few thousand dollars. The demand for full time faculty with a career before them has collapsed. When the consequences of putting short-term corporate profits before jobs for Americans fully hit, the demand for university education will collapse and with it American science and technology.

The collapse of the Soviet Union was the worst thing that ever happened to the United States. The

two main consequences of the Soviet collapse have been devastating. One consequence was the rise of the neoconservative hubris of US world hegemony, which has resulted in 14 years of wars that have cost $6 trillion. The other consequence was a change of mind in socialist India and communist China, large countries that responded to “the end of history” by opening their vast under-utilized labor forces to Western capital, which resulted in the American economic decline that this article describes, leaving a struggling economy to bear the enormous war debt. It is a reasonable conclusion that a social-political-economic system so incompetently run already is a Third World country.

Paul Craig Roberts has had careers in scholarship and academia, journalism, public service, and business. He is chairman of The Institute for Political Economy. He has held academic appointments at Virginia Tech, Tulane University, University of New Mexico, Stanford University where he was Senior Research Fellow in the Hoover Institution, George Mason University where he had a joint appointment as professor of economics and professor of business administration, and Georgetown University where he held the William E. Simon Chair in Political Economy in the Center for Strategic and International Studies.

You can Find The Original Article Here

Among Palestinians and Israelis, the recent upsurge in violence has been variously described as the children’s, lone-wolf, Jerusalem and smartphone intifadas. Each describes a distinguishing feature of this round of clashes. The steady erosion of Fatah and Hamas’ authority during the post-Oslo years, as the Palestinian factions proved incapable of protecting their people from the structural violence of the occupation, has driven Palestine’s orphaned children to the streets, armed with stones. The growing hopelessness and sense of abandonment have led a few so-called “lone wolves” to vent their fury on Israelis with improvised weapons such as knives, screwdrivers and cars. These attacks have attracted the most publicity, becoming the equivalent of the second intifada’s suicide bomber. But they serve chiefly as a barometer of Palestinian despair. Jerusalem is the centre of events, with the Palestinians’ only unifying symbol, Al Aqsa mosque, at its heart. For Palestinians, the incremental takeover of the compound – and the West’s indifference – is like watching the mass dispossession of 1948 play out again in slow motion. In addition, Jerusalem is the main fault line. Israel’s illegal annexation of the city has left Palestinians there in an extreme form of isolation – indefinitely stateless and supremely vulnerable.

And finally, the smartphone camera has allowed Palestinians to document their suffering and witness unmediated their compatriots’ personal acts of resistance and self-sacrifice. Futile knife attacks may appal outsiders, but for many Palestinians they are the moment when an individual briefly reclaims his or her agency and fights back on behalf of a collectively subjugated and humiliated people. The need for so many different labels for these events reveals another important facet of the current Palestinian struggle: its disorganised nature. Israel has almost completed the division and enclosure of Palestinians into disconnected enclaves. As they hear the sound of the prison doors closing, Palestinian youths are lashing out at the guards closest to hand. Because the divisions between Palestinian populations have become so entrenched geographically, and their leaders politically, it is hard for Palestinians to find any unifying vision or organising principle. Do they fight first against their occupiers or their spent leadership? But the lack of planning and discipline has exposed Israel’s own limitations too. Israel has little but stopgap measures to defend against the protests. Its intelligence agencies cannot predict the lone wolf, its guns cannot deter the knife, its military might cannot subdue the craving for justice and dignity. Strangely, in the face of all this, there are signs of a parallel breakdown of order and leadership on the Israeli side. Lynch mobs of Jews patrol Jerusalem and Israeli cities, calling out “Death to the Arabs!” A jittery soldier causes pandemonium by firing his rifle in a train carriage after a bogus terror alert. An Israeli Jew stabs another because he looks “Arab”.

Meanwhile, politicians and police commanders stoke the fear. They call for citizens to take the law into their own hands. Palestinian workers are banned from Jewish towns. Israeli supermarkets remove knives from shelves, while 8,000 Israelis queue up for guns in the first 24 hours after permit rules are eased. Some of this reflects a hysteria, a heightened sense of victimhood among Israelis, fuelled by the knife attack videos. But the mood dates to before the current upheavals. It is also a sign of the gradual leaching of the settler’s lawlessness into the mainstream. A popular slogan from the past weeks is: “The army’s hands are tied.” Israeli civilians presumably believe they must take up arms instead. After six uninterrupted years of the extreme right in power, Israelis don’t blame their government’s policy of relentless force for the backlash. They demand yet more force against the Palestinians. Polls show Avigdor Lieberman, the former Moldovan bouncer who became the hard man of the Israeli right, is most favoured to lead the nation out of the crisis. Solutions are being applied most savagely in East Jerusalem, where Palestinians are being locked even more tightly into neighbourhood ghettoes. Israel’s “eternal, unified capital” is being carved up by roadblocks. Palestinian residents are made to endure daily searches and insults that will sow the seeds of yet more fury and resistance. As Israel tries to slam shut the door of one prison cell in Jerusalem, the inmates threaten to break open the door of another, in Gaza. Israel’s leadership has watched uneasily the repeated breaches of Gaza’s fence over the past week by youths enraged by their own misery and what they see happening in the other prison wings. The current unrest may recede, but more waves of protest of ever greater intensity are surely not far behind. Jafar Farah, a Palestinian leader in Israel, has warned of it heading slowly from a national conflict into a civil war, one defined by the kind of debased one-state solution Israel is imposing. The chaotic violence of the past weeks looks like a warning from the future – a future Israel is hurtling towards.

Jonathan Cook is an award-winning British journalist based in Nazareth, Israel, since 2001. He is the author of three books on the Israeli-Palestinian conflict: Blood and Religion: The Unmasking of the Jewish State (2006); Israel and the Clash of Civilisations: Iraq, Iran and the Plan to Remake the Middle East (2008)

Disappearing Palestine: Israel’s Experiments in Human Despair (2008)

The Original Article isFound Here

WHY AUSTERITY IS A DANGEROUS IDEA: When everyone tries it at once, austerity makes the debt bigger, not smaller

The current debt and deficit panic is nothing new. It’s been a staple of American politics since the Republic’s inception. But this season it has taken a new turn. Congress, the fiscal arm of the government, is engaged in asymmetric siege warfare. On one side the Republicans want only cuts, on the other the Democrats want both cuts and tax increases. Both agree however that cuts are absolutely necessary; the only question is the timing and magnitude involved. Unfortunately, budget cuts are exactly the wrong thing to do at this moment. And before anyone throws up their hands and says “Keynesian claptrap,” there is nothing necessarily Keynesian in what I am about to say. Simple logic and arithmetic will suffice.

(MORE: America’s Forgotten Economic Challenge)

Austerity, the policy of cutting state spending to solve debt and growth problems, sells itself to us through a strange combination of morality and seduction. Its moral claim lies in the love of parsimony over prodigality that characterizes economic thought from Adam Smith onward. In this morality play, saving leads to investment, and investment leads to growth. Spending, in contrast, leads to consumption, and consumption leads to debt, especially when the government is involved. What we see in Greece therefore is simply the most egregious example of a secular trend toward overspending. We must cut to restore ourselves and not become Greece. So the story goes. Austerity suggests that you can have your cake and eat it too, but only when you cut the cake first. Cuts are seen to be growth enhancing, not growth retarding. They restore that all-important “business confidence” necessary for the economy to function. There is however a rather big problem with this line of thinking. The first is that for people to save, they need to have income from which to save. So if you are, for example, a state in the euro zone today, and every similar state saves at the same time by cutting spending, the result is the shrinkage of everyone’s economy since they are one another’s trading partners and sources of income. Perversely, their debt goes up, not down, relative to their (shrinking) GDP, which is what has happened to every European country that has undergone an austerity program since 2010. They now have more debt, not less.

(MORE: The Promise of More: Why We Should Raise the Minimum Wage)

Austerity, when everyone tries it at once, makes the debt bigger, not smaller. The E.U. is one of the two largest growth centers of the global economy. If the U.S., the other big one, decides to join in this “austerity binge” the result will be more, not less, U.S. debt and an even bigger growth crisis for the global economy. So why then did so many countries in Europe do this? It’s about money all right, but not in the way you think. As we found out in the mortgage crisis in the U.S., you can’t have over-borrowing without over-lending, and core European banks (which are twice the size and three times as levered up as their “too big to fail” American counterparts) over-lent to southern Europe on an epic scale, spending northern European savings in southern European bond markets and stuffing their balance sheets with those bonds in the process. Now that these bonds have gone bad, deprived of national currencies with which the governments responsible for these banks could bail them out (a side effect of the euro) European states are reduced to cutting, adding liquidity and praying while the situation goes from bad to worse. Cutting in such a world turbo charges the already bad shrinkage problem.

What about the theory that cuts will lead to greater confidence if only we lose our fear of the cuts and really go for it? The technical, and very non-Keynesian idea here is called the expansionary fiscal-consolidation hypothesis. It goes like this: when the government cuts spending in the middle of a recession, despite the economy falling about our ears with jobs and income evaporating around us, we will know that years ahead the state will be smaller and so we will pay less taxes relative to our lifetime income. Buoyed by this knowledge we will spend more today, despite the recession, thereby curing it. This is the mechanism that is supposed to make us all more confident and spend more. If you know anyone in the world who actually behaves like this, don’t lend them any money.

(MORE: Why the Argument for Austerity Took a Big Hit Recently)

Given then that cuts lead to more debt and less confidence; does it follow that we can have whatever level of debt and deficit we like with no consequences? Absolutely not. And this is where a Keynesian idea is appropriate: that the time for austerity is the boom, not the slump. Countries that have successfully reduced debt have done so when others are expanding and their own economy is booming, which makes perfect sense. This is why austerity is a dangerous idea: it doesn't work in the world that we actually inhabit. In the imaginary world of austerity, cuts always happen to someone else. Sadly, as Europe is proving all too well, in the world that we actually inhabit there is no “someone else” to pass the costs on to as we all try to shrink to grow.

The Article can be accessed here

The Book can be Downloaded Here

Mark Blyth: Mark Blyth is a professor of International Political Economy at Brown University and the author of Austerity: The History of a Dangerous Idea.

Further Reading on Austerity on the Links Below:

Greece is Clearest Example That Austerity Doesn't Work

The Austerity Delusions: Why A Bad Idea Won over The West

It is Official: Austerity Economics doesn't Work.

This is a VIB – very important book. Nearly everyone agrees about that. But the reasons for its importance have changed in the months since it was published. At first it was important because it was a big book on a big subject: a book of grand ambition about inequality, written not by the latest "thinker" but a respected academic economist with real numbers to go with his theory. We hadn't had anything like that in ages. This was the "Piketty as rockstar" phase, when the book was an "improbable hit" and people wrote breathless articles about the modern successor to Marx who could crunch the numbers but also quote Balzac, The Simpsons and The West Wing. Writing a bestselling economics book is usually a good way to make other economists hate you. But at first even they heaped praise on Thomas Piketty for casting fresh light on inequality – an area where the official statistics are notoriously weak. Say what you like about the theory, the argument went, you had to thank him for the numbers. At this point you didn't need to read it to have an opinion about it. Indeed for some, not having read it was a badge of pride. Ed Miliband unashamedly told people he hadn't got beyond the first chapter – and kept on saying that for several weeks. Maybe he has now. Or maybe he's just decided that the debate about the book is more important than the book itself. That's certainly the conclusion I have come to, and not just because several of its central arguments have now been questioned. There are many claims in the 700-odd pages, but let me highlight some of the important ones, before moving on to whether – and why – any of this matters.

Claim one is that income inequality has increased sharply since the late 1970s, with a particularly dramatic rise in the share of total income going to the very highest earners. The most quoted Piketty statistic here is one that no one, to my knowledge, has questioned: that 60% of the increase in US national income in the 30 years after 1977 went to just the top 1% of earners. The only section of the US population that has done better than the top 1% is the top 10th of that 1%. The top 100th of the 1% have done best of all. These are remarkable numbers. Uncovering and bringing together this data for the US and a handful of other countries using tax returns is a major achievement, which some say merits a Nobel prize on its own. Piketty goes on to show that this dramatic rise in income inequality hasn't happened in all rich economies, and, oddly, does not really have much to do with capital. Even in the US, it has been driven by soaring salaries at the top end of the pay scale, not rising incomes from capital.

That rather large complication to the story does not stop Piketty focusing the rest of the book on capital, which he says has also become more unequally distributed since the 1970s, not just in the US but in Europe too. He believes this trend toward greater wealth inequality is very likely to continue, because the returns from capital are likely to grow faster than the economy itself, and faster than the owners of that wealth are likely to be able to spend it. This is the "central contradiction of capitalism", which he summarises with a Marxian turn of phrase: "the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future." This is where things get tricky, not just for Piketty but for the general reader, who simply wants to know whether he's right. Let me cut to the chase and say that the evidence for rising wealth inequality is not nearly as clear as the evidence for rising inequality of incomes. Further, even some of Piketty's biggest fans in the academic world have their doubts whether the forces pushing the economy in that direction are as strong as he suggests. Most would agree that the developed economies are likely to grow more slowly as their populations get older. This might have the "terrifying" consequences for wealth inequality that he suggests, but it's also possible that slower growth will be as costly to the owners of capital as it is for everyone else. Their share of the total pie might even decrease. That is actually what has happened in the UK recently. In the boom years after the mid 90s, the owners of capital took a larger share of national income, and the labour share tended to decline. But the trend reversed itself when the economy hit the skids in 2007, and the labour share is back to where it was in the early 70s. Income inequality has also fallen slightly over this period, at least in the UK. So, whatever terrible things have happened to our economy in the past five years, they haven't followed the long-term path sketched out by Piketty. Rather the opposite. There is some evidence that the top 10% in the US is sitting on a higher share of total wealth now than in the 70s. But it's difficult to draw similar conclusions about Britain or France because the data is so patchy. From what we can tell, the share of total wealth held by the top 1% – and 0.01% – hasn't changed much at all.

Piketty has some interesting analysis demonstrating that wealth begets more wealth: the richer university endowments, for example, tend to earn the highest returns on their investments, not just in absolute but percentage terms. This rings true and also has some economic logic to it. The more money you have to invest, the more – in cash terms – you can afford to spend on finding the best opportunities, without materially cutting into your returns. As a force for rising wealth inequality this makes sense and probably merits a book of its own, given that individuals across the developed world are increasingly having to take greater responsibility for saving for their retirement. It matters if small investors are going to be systematically disadvantaged in making these long-term investments. But the concentration of wealth at the top doesn't seem as inexorable as all that. As the economist and former US treasury secretary Larry Summers has pointed out, most of the people on the list of 400 wealthiest Americans in 1982 would have had enough to money to qualify in 2012 if they had simply earned a return of 4% a year. But fewer than a 10th actually did so. The proportion of the top 400 who inherited their wealth has actually been falling – not rising, as Piketty's theory would also suggest.

Given what has been happening to incomes at the top, you would expect to have seen more concentration of wealth than we can find in the data. That might be – as Piketty suggests – because rich people are good at hiding their money from the taxman. But it might also be because they are very good at spending their money, and their children even more so. I was at a conference recently for advisers and trustees to family estates, and was amused to hear speaker after speaker assert that the "biggest threat" to a family fortune was "not the taxman or the markets but the family itself". Say we agree with Piketty, and conclude that wealth has become more concentrated, his own numbers show this is a fairly recent phenomenon. As he admits, the single most important structural change in the distribution of wealth in the past 100 years has been in the other direction. That is the emergence of a new "patrimonial class", somewhere between rich and poor, owning 25%-35% of the nation's wealth. He describes the emergence of this class in the middle years of the 20th century as a transformation that "deeply altered the social landscape and the political structure of society and helped redefine the terms of distributive conflict". That may well be true. But for me, what's more interesting about this shift is not what it might or might not have done for "the terms of distributive conflict", but what it did for households – and the broader economy. Piketty really doesn't go into that at all, which is a shame because if you don't have a clear understanding of the benefits of broader capital ownership it's difficult to explain why it's so "terrifying" if things are now moving back in the other direction. The latest official survey of UK household incomes and wealth shows that around a third of all UK households has either negative net worth – debts greater than their assets – or net financial assets worth less than £5,000. I am more worried about that lack of wealth at the bottom and in the middle of the income scale than about the squillions being amassed by a very few. We know that families with that little to fall back on are much more likely to fall into long-term cycles of dependency and poverty. We also know – and if we didn't know we could learn from reading the Daily Mail that Piketty's "patrimonial middle class" feels more squeezed these days, whatever might have happened to the financial value of their home. He seems to assume that all these things are connected, that the greater income flowing to the 1% is making things worse for everyone else. But he never really makes the case. That is remarkable omission for a book of such magisterial sweep.

When I was first learning economics in the late 80s and 90s, the UK was just getting used to the free-market idea that higher incomes at the top did not have to mean lower incomes at the bottom. To ensure growth in the economy, the message went, you had to give the "wealth creators" the incentive to increase both the pie and their slice of it. Economists still believe that, up to a point. But in the wake of the financial crisis there has been broader acceptance of the view that very high levels of income inequality can increase the risk of such crises, and so hurt the economy. We also have evidence – from the IMF, of all places – that in unequal economies, more redistributive taxes might promote faster growth. As with most things, it's a matter of degree. This all helps to explain why Piketty's book has been such a smash. Many people are worried about the slow rate of growth in the developed economies since the financial crisis in 2008. Many are also worried about rising inequality. At first glance, Capital seems to offer an elegant way to explain both. But, by his own admission, the world is a lot more complicated than talk of a "central contradiction to capitalism" might suggest. So is the relationship between capital accumulation and growth.

Like Miliband, Piketty sees a clear difference between the wealth creators and the asset strippers – between the fat cat "rentier" capital that devours the future and the more socially useful capital of the entrepreneur. But his own broad definition of capital doesn't really help us draw that kind of distinction. It's all thrown in together, along with all of our houses, and everything else with a financial value that can be bought or sold. That's a pity because if there's one thing that policymakers around the world are looking for it's a way to channel a bit more money into productive investment – and a bit less into house prices and stocks and shares. Piketty deserves huge credit for kick-starting a debate about inequality and illuminating the distribution of income and wealth. But when it comes to the forces driving growth and wealth accumulation in our modern economy what he has probably done most to bring out into the open is our collective ignorance and confusion.

This Review was by Stephanie Flanders is chief market strategist for Europe, JP Morgan Asset Management. The Original Link is here

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Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity. The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, over all U.S. economic performance has faltered. If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it……

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William Lazonick is a professor of economics at the University of Massachusetts Lowell, the codirector of its Center for Industrial Competitiveness, and the president of the Academic-Industry Research Network. His bookSustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States won the 2010 Schumpeter Prize.

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IN CORPORATIONS, IT’S OWNER-TAKE-ALL - BY HAROLD MEYERSON

Labor Day — that mocking reminder that this nation once honored workers — is upon us again, posing the nagging question of why the economy ceased to reward work. Was globalization the culprit? Technological change? Anyone seeking a more fundamental answer should pick up the September issue of the Harvard Business Review and check out William Lazonick’s seminal essay on U.S. corporations, “Profits Without Prosperity.” Like Thomas Piketty, Lazonick, a professor at the University of Massachusetts at Lowell, is that rare economist who actually performs empirical research. What he has uncovered is a shift in corporate conduct that transformed the U.S. economy — for the worse. From the end of World War II through the late 1970s, he writes, major U.S. corporations retained most of their earnings and reinvested them in business expansions, new or improved technologies, worker training and pay increases. Beginning in the early ’80s, however, they have devoted a steadily higher share of their profits to shareholders. How high? Lazonick looked at the 449 companies listed every year on the S&P 500 from 2003 to 2012. He found that they devoted 54 percent of their net earnings to buying back their stock on the open market — thereby reducing the number of outstanding shares, whose values rose accordingly. They devoted another 37 percent of those earnings to dividends. That’s a total of 91 percent of their profits that America’s leading corporations targeted to their shareholders, leaving a scant 9 percent for investments, research and development, expansions, cash reserves or, God forbid, raises.

As late as 1981, corporations directed a little less than half their profits to shareholders, but the shareholders’ share began rising in 1982, when Ronald Reagan’s Securities and Exchange Commission removed any limits on corporations’ ability to repurchase their own stock and when employers — emboldened by Reagan’s destruction of the federal air traffic controllers’ union — began large-scale union-busting. Buybacks really came into their own during the 1990s, when the pay of corporations’ chief executives became linked to the rise in the value of their company’s shares. From 2Cisco Systems devoted 121 percent of its net income to repurchases and dividends, and 92 percent of its CEO pay was stock-based. About that 121 percent: With companies lavishing virtually all their net income on shareholders and executives, the way many of them cover their actual business expenses — their R&D, their expansion — is by taking on debt through the sale of corporate bonds. A number of companies, however —most prominently, IBM — borrow specifically to increase their payout to shareholders. And IBM is not alone. Friday’s Wall Street Journal reportedthat U.S. companies are currently incurring record levels of debt, much of which, the Journal noted, “is being used to refinance existing debt, being sent back to shareholders as dividend payments and share buybacks, or banked in the corporate treasury as executives consider how to potentially deploy funds as the economy expands.” Many of the companies that have spent the most on buybacks, Lazonick demonstrates, have also received taxpayer money to fund research they could otherwise afford to perform themselves. 2003 through 2012, the chief executives of the 10 companies that repurchased the most stock (totaling $859 billion in aggregate) received 58 percent of their pay in stock options or stock awards. For a CEO, getting your company to use its earnings to buy back its shares might reduce its capacity to research or expand, but it’s a sure-fire way to boost your own pay. Exxon Mobil, for instance, devoted 83 percent of its net income to stock repurchases and dividends, and 73 percent of its CEO pay was stock-based.

What Lazonick has uncovered is the present-day American validation of Piketty’s central thesis that the rate of return on investment generally exceeds the rate of economic growth. Indeed, Lazonick has documented that wealth in the United States today comes chiefly from retarding businesses’ ability to invest in growth-engendering activity. The purpose of the modern U.S. corporation is to reward large investors and top executives with income that once was spent on expansion, research, training and employees. To restore a more socially beneficial purpose, Lazonick proposes scrapping the SEC rule that permitted rampant stock repurchases and requiring corporations to have employee and public representatives on their boards. Lazonick’s article does nothing less than decode the Rosetta Stone of America’s economic decline. The reason only luxury and dollar stores are thriving, the reason German companies outcompete ours, the redistribution of income from workers to investors – it’s all here, in Lazonick’s numbers. The lesson for Labor Day 2014 couldn’t be plainer: Unless we compel changes such as those Lazonick suggests to our model of capitalism, ours will remain a country for investors only, where work is a sucker’s game

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In a report released by ONE, an anti-poverty organization, it is estimated that corruption causes 3.6 million unnecessary deaths and costs poor countries $1 trillion each year as at September 2014. Using three different methodologies to calculate the cost of corruption, all three measures indicated that the loss was either $1 trillion or $2 trillion. In what is called a “trillion dollar scandal,” corrupt business practices, “anonymous shell companies, money laundering and illegal tax evasion” all serve to severely reduce the effectiveness of poverty relief efforts. While extreme poverty has been reduced to half its original level over the past 20 years and has the potential to be completely eradicated by 2030, corruption is putting much of that progress at risk. While corruption is damaging in almost all countries, it is especially dangerous in poorer and developing countries and mostly affects children. It is estimated that millions of deaths could be avoided if corruption was combated and recovered funds were reinvested in essential fields.

Furthermore, the money that is siphoned out of poor countries is not from international development aid, which has helped make a considerable improvement, but rather directly from businesses in these countries. The money is generated by domestic businesses and illegally extracted out of the country. The largest source of financial drain is the illegal manipulation of cross-border trade. The organization found that even recovering a small amount of the money lost to corruption could dramatically affect development. In Sub-Saharan Africa, a small amount of recovered funds could provide an education to an additional 10 million children each year; pay for an additional 500,000 primary school teachers; provide antiretroviral drugs for more 11 million people with HIV/AIDS and buy nearly 165 million vaccines.

The report stresses action that serves to end the secrecy that allows corruption to thrive. If specific policies were implemented that increased transparency and combated corruption in the four areas of “natural resource deals, the use of phantom firms, tax evasion and money laundering,” developing countries could considerably stem the financial drain. Natural resources in particular can provide a vital source of funds that could greatly increase economic growth in many developing countries. Corruption concerning natural resources is particularly bad, with approximately 20 countries in Sub-Saharan Africa rich in natural resources but receiving few benefits from these reserves.

Specifically, One calls for mandatory reporting laws for the natural resource sectors and publish open data so citizens are able to track where travels from and to, ensuring that the funds are not lost to corruption. Published in anticipation of the G20 meeting in Brisbane, Australia in November, the organization stresses the importance for the G20 nations to address the issue. Now that the cost of corruption has been defined in real terms, the fight against corruption can become more directed and effective.

Author is William Ying; The original article is Here

23 Things They Don't Tell You About Capitalism - Ha-Joon Chang

THERE IS NO SUCH THING AS A FREE MARKET

WHAT THEY WILL TELL YOU: Markets need to be free. When the government interferes to dictate what market participants can or cannot do, resources cannot flow to their most efficient use. If people cannot do the things that they find most profitable, they lose the incentive to invest and innovate. Thus, if the government puts a cap on house rents, landlords lose the incentive to maintain their properties or build new ones. Or, if the government restricts the kinds of financial products that can be sold, two contracting parties that may both have benefited from innovative transactions that fulfill their idiosyncratic needs cannot reap the potential gains of free contract. People must be left "free to choose," as the title of free-market visionary Milton Friedman’s famous book goes.

LABOUR OUGHT TO BE FREE: In 1819 new legislation to regulate child labor, the Cotton Factories Regulation Act, was tabled in the British Parliament. The proposed regulation was incredibly "light touch" by modern standards. It would ban the employment of young children – that is, those under the age of nine. Older children (aged between ten and sixteen) would still be allowed to work, but with their working hours restricted to twelve per day (yes, they were really going soft on those kids). The new rules applied only to cotton factories, which were recognized to be exceptionally hazardous to workers’ health. The proposal caused huge controversy. Opponents saw it as undermining the sanctity of freedom of contract and thus destroying the very foundation of the free market. In debating this legislation, some members of the House of Lords objected to it on the grounds that "labor ought to be free." Their argument said: the children want (and need) to work, and the factory owners want to employ them; what is the problem?

Today, even the most ardent free-market proponents in Britain or other rich countries would not think of bringing child labor back as part of the market liberalization package that they so want. However, until the late 19th or the early 20th century, when the first serious child labor regulations were introduced in Europe and North America, many respectable people judged child labour regulation to be against the principles of the free market. Thus seen, the "freedom" of a market is, like beauty, in the eyes of the beholder. If you believe that the right of children not to have to work is more important than the right of factory owners to be able to hire whoever they find most profitable, you will not see a ban on child labor as an infringement on the freedom of the labor market. If you believe the opposite, you will see an "unfree" market, shackled by a misguided government regulation. We don’t have to go back two centuries to see regulations we take for granted (and accept as the "ambient noise" within the free market) that were seriously challenged as undermining the free market, when first introduced. When environmental regulations (e.g., regulations on car and factory emissions) appeared a few decades ago, they were opposed by many as serious infringements on our freedom to choose. Their opponents asked: if people want to drive in more polluting cars or if factories find more polluting production methods more profitable, why should the government prevent them from making such choices? Today, most people accept these regulations as "natural." They believe that actions that harm others, however unintentionally (such as pollution), need to be restricted. They also understand that it is sensible to make careful use of our energy resources, when many of them are non-renewable. They may believe that reducing human impact on climate change makes sense too. If the same market can be perceived to have varying degrees of freedom by different people, there is really no objective way to define how free that market is. In other words, the free market is an illusion. If some markets look free, it is only because we so totally accept the regulations that are propping them up that they become invisible.

PIANO WIRES & KUNGFU MASTERS: Like many people, as a child I was fascinated by all those gravity-defying kung fu masters in Hong Kong movies. Like many kids, I suspect, I was bitterly disappointed when I learned that those masters were actually hanging on piano wires. The free market is a bit like that. We accept the legitimacy of certain regulations so totally that we don’t see them. More carefully examined, markets are revealed to be propped up by rules – and many of them. To begin with, there is a huge range of restrictions on what can be traded; and not just bans on "obvious" things such as narcotic drugs or human organs. Electoral votes, government jobs and legal decisions are not for sale, at least openly, in modern economies, although they were in most countries in the past. University places may not usually be sold, although in some nations money can buy them – either through (illegally) paying the selectors or (legally) donating money to the university. Many countries ban trading in firearms or alcohol. Usually medicines have to be explicitly licensed by the government, upon the proof of their safety, before they can be marketed. All these regulations are potentially controversial – just as the ban on selling human beings (the slave trade) was one and a half centuries ago.

There are also restrictions on who can participate in markets. Child labor regulation now bans the entry of children into the labor market. Licenses are required for professions that have significant impacts on human life, such as medical doctors or lawyers (which may sometimes be issued by professional associations rather than by the government). Many countries allow only companies with more than a certain amount of capital to set up banks. Even the stock market, whose underregulation has been a cause of the 2008 global recession, has regulations on who can trade. You can’t just turn up in the New York Stock Exchange (NYSE) with a bag of shares and sell them. Companies must fulfill listing requirements, meeting stringent auditing standards over a certain number of years, before they can offer their shares for trading. Trading of shares is only conducted by licensed brokers and traders. Conditions of trade are specified too. One of the things that surprised me when I first moved to Britain in the mid-1980s was that one could demand a full refund for a product one didn’t like, even if it wasn’t faulty. At the time, you just couldn’t do that in Korea, except in the most exclusive department stores. In Britain, the consumer’s right to change her mind was considered more important than the right of the seller to avoid the cost involved in returning unwanted (yet functional) products to the manufacturer. There are many other rules regulating various aspects of the exchange process: product liability, failure in delivery, loan default, and so on. In many countries, there are also necessary permissions for the location of sales outlets – such as restrictions on street-vending or zoning laws that ban commercial activities in residential areas.

Then there are price regulations. I am not talking here just about those highly visible phenomena such as rent controls or minimum wages that free-market economists love to hate. Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation. How is the immigration maximum determined? Not by the "free" labor market, which, if left alone, will end up replacing 80–90 per cent of native workers with cheaper, and often more productive, immigrants. Immigration is largely settled by politics. So, if you have any residual doubt about the massive role that the government plays in the economy’s free market, then pause to reflect that all our wages are, at root, politically determined. Following the 2008 financial crisis, the prices of loans (if you can get one or if you already have a variable rate loan) have become a lot lower in many countries thanks to the continuous slashing of interest rates. Was that because suddenly people didn’t want loans and the banks needed to lower their prices to shift them? No, it was the result of political decisions to boost demand by cutting interest rates. Even in normal times, interest rates are set in most countries by the central bank, which means that political considerations creep in. In other words, interest rates are also determined by politics. If wages and interest rates are (to a significant extent) politically determined, then all the other prices are politically determined, as they affect all other prices.

IS FREE TRADE FREE? We see a regulation when we don’t endorse the moral values behind it. The 19th-century high-tariff restriction on free trade by the U.S. federal government outraged slave-owners, who at the same time saw nothing wrong with trading people in a free market. To those who believed that people can be owned, banning trade in slaves was objectionable in the same way as restricting trade in manufactured goods. Korean shopkeepers of the 1980s would probably have thought the requirement for "unconditional return" to be an unfairly burdensome government regulation restricting market freedom. This clash of values also lies behind the contemporary debate on free trade vs. fair trade. Many Americans believe that China is engaged in international trade that may be free but is not fair. In their view, by paying workers unacceptably low wages and making them work in inhumane conditions, China competes unfairly. The Chinese, in turn, can riposte that it is unacceptable that rich countries, while advocating free trade, try to impose artificial barriers to China’s exports by attempting to restrict the import of "sweatshop" products. They find it unjust to be prevented from exploiting the only resource they have in greatest abundance – cheap labor.

Of course, the difficulty here is that there is no objective way to define "unacceptably low wages" or "inhumane working conditions." With the huge international gaps that exist in the level of economic development and living standards, it is natural that what is a starvation wage in the U.S. is a handsome wage in China (the average being 10 per cent that of the U.S.) and a fortune in India (the average being 2 per cent that of the U.S.) Indeed, most fair-trade-minded Americans would not have bought things made by their own grandfathers, who worked extremely long hours under inhumane conditions. Until the beginning of the twentieth century, the average work week in the U.S. was around 60 hours. At the time (in 1905, to be more precise), it was a country in which the Supreme Court declared unconstitutional a New York state law limiting the working days of bakers to 10 hours, on the grounds that it "deprived the baker of the liberty of working as long as he wished." Thus seen, the debate about fair trade is essentially about moral values and political decisions, and not economics in the usual sense. Even though it is about an economic issue, it is not something economists with their technical tool kits are particularly well equipped to rule on. All this does not mean that we need to take a relativist position and fail to criticize anyone because anything goes. We can (and I do) have a view on the acceptability of prevailing labour standards in China (or any other country, for that matter) and try to do something about it, without believing that those who have a different view are wrong in some absolute sense. Even though China cannot afford American wages or Swedish working conditions, it certainly can improve the wages and the working conditions of its workers. Indeed, many Chinese don’t accept the prevailing conditions and demand tougher regulations. But economic theory (at least free-market economics) cannot tell us what the ‘right’ wages and working conditions should be in China.

I DON'T THINK WE ARE IN FRANCE ANYMORE: In July 2008, with the country’s financial system in meltdown, the US government poured $200 billion into Fannie Mae and Freddie Mac, the mortgage lenders, and nationalized them. On witnessing this, the Republican Senator Jim Bunning of Kentucky famously denounced the action as something that could only happen in a "socialist" country like France. France was bad enough, but on 19 September 2008, Senator Bunning’s beloved country was turned into the Evil Empire itself by his own party leader. According to the plan announced that day by President George W. Bush and subsequently named TARP (Troubled Asset Relief Program), the U.S. government was to use at least $700 billion of taxpayers’ money to buy up the "toxic assets" choking up the financial system. President Bush, however, did not see things quite that way. He argued that, rather than being "socialist" the plan was simply a continuation of the American system of free enterprise, which "rests on the conviction that the federal government should interfere in the market place only when necessary." Only that, in his view, nationalizing a huge chunk of the financial sector was just one of those necessary things.

Mr. Bush’s statement is, of course, an ultimate example of political double-speak – one of the biggest state interventions in human history is dressed up as another workaday market process. However, through these words Mr. Bush exposed the flimsy foundation on which the myth of the free market stands. As the statement so clearly reveals, what is a necessary state intervention consistent with free-market capitalism is really a matter of opinion. There is no scientifically defined boundary for free market. If there is nothing sacred about any particular market boundaries that happen to exist, an attempt to change them is as legitimate as the attempt to defend them. Indeed, the history of capitalism has been a constant struggle over the boundaries of the market. A lot of the things that are outside the market today have been removed by political decision, rather than the market process itself – human beings, government jobs, electoral votes, legal decisions, university places or uncertified medicines. There are still attempts to buy at least some of these things illegally (bribing government officials, judges or voters) or legally (using expensive lawyers to win a lawsuit, donations to political parties, etc.), but, even though there have been movements in both directions, the trend has been towards less marketization.

For goods that are still traded, more regulations have been introduced over time. Compared even to a few decades ago, now we have much more stringent regulations on who can produce what (e.g., certificates for organic or fair-trade producers), how they can be produced (e.g., restrictions on pollution or carbon emissions), and how they can be sold (e.g., rules on product labelling and on refunds). Furthermore, reflecting its political nature, the process of re-drawing the boundaries of the market has sometimes been marked by violent conflicts. The Americans fought a civil war over free trade in slaves (although free trade in goods – or the tariffs issue – was also an important issue). The British government fought the Opium War against China to realize a free trade in opium. Regulations on free market in child labour were implemented only because of the struggles by social reformers, as I discussed earlier. Making free markets in government jobs or votes illegal has been met with stiff resistance by political parties who bought votes and dished out government jobs to reward loyalists. These practices came to an end only through a combination of political activism, electoral reforms and changes in the rules regarding government hiring. Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science.

Thus seen, opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed. Saying that an existing regulation should be abolished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on one-dollar-one-vote principle. So, when free-market economists say that a certain regulation should not be introduced because it would restrict the "freedom" of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law. Their ideological cloak is to pretend that their politics is not really political, but rather is an objective economic truth, while other people’s politics is political. However, they are as politically motivated as their opponents. Breaking away from the illusion of market objectivity is the first step toward understanding capitalism.

Extract From “23 Things They Don't Tell You About Capitalism”

By Ha-Joon Chang who teaches in the faculty of economics at the University of Cambridge. His other books include "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism" and "Kicking Away the Ladder."

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