Variants of the Ponzi scheme are rife today – ie, using new investments (or loans) to pay off old investors (or banks). As long as interest rates are low and money is easy, it may work. When credit collapses, bye bye to the debt zombies.
– originally posted January 2020, when the Dow approached 30K
I woke up this morning and realized – it’s time to unload my stock portfolio!
As my mind cleared, I recalled that I didn’t actually have a portfolio, or any stocks at all.
I don’t even have a 401K. My retirement plan is the 401EZ – it should cover me, as long as I don’t stop working after I retire.
Just the same – it’s time to sell stocks. A Dow of 30,000?
It was 20,000 a year ago, and that was padded.
Take a look around – do you see 50% economic growth since last Spring? I see low interest rates, a huge tax cut for the rich, a housing bubble in major markets…. but not much economic growth.
But What About Uber?
Sorry, Uber is not “economic growth” – at best it’s a lateral movement that provides a slight improvement in taxi services. Whoop tee do.
What else is booming? Tourism? Destroying the environment in search of more fossil fuels? New advances in robotic senior care?
OK, I grant you those – but a 50% boost to the entire economy? I’m skeptical.
It’s a bubble. And while I can’t name the date it will burst, it is not going to inflate much further.
Let’s look back at the last bubble – which peaked much lower than this one.
The 2008 Crash Revisited
In the mid-2000s, the booming stock market – then passing peaks of 12, 13, and even 14,000 – was widely called “irrational exuberance,” even by the former Fed chairman.
No one believed the economy had grown that much, nor that housing prices should have doubled in a decade. The word bubble was widely bandied about.
Sure enough, the markets crashed.
In 2008, the Dow crashed to about 8000, and took until 2013 to get back to 14,000.
What brought the markets (housing and stocks in particular) back was not actual economic growth, but microscopic interest rates (.25 at one point in the US, which had a past average of around 4-5% in non-inflationary periods). Nearly-free money was hurled around, and lacking productive investments (more on this in another post) the money basically re-inflated stock and housing bubbles.
As I write, the Dow is over 29,000 – double the peak of just a few years ago.
Ie – double the peak that crashed hard in 2008.
Amazing What Cheap Money Can Do
Why? Cheap money. Low interest rates, big bonuses paid to the stock-buying classes, and most recently an absurdly unnecessary tax cut that poured billions more into the pockets of stock-buyers.
To no one’s surprise, the market bubble has inflated to new “irrational” heights.
But now, interest rates are as low as they can go (negative rates would destroy savings and retirement funds – a political non-starter unless we’re in a severe depression).
The tax cut will continue to pour money into the pockets of the rich – but the effect on the market will be to sustain current prices, not increase them.
The current peak will be almost impossible to surpass.
Sensing the peak, speculators will look for more lucrative “investments.” They’ll be selling – so whatever new cheap money comes into stocks, the speculators will balance by selling. The peak has been reached.
Sooner or later, stagnant or rising interest rates and declining effects of the tax cut will result in an overall slowdown. Recessions do happen, you know.
At that point, the downward spiral begins – people sell stocks because they need money to cover their debts. With increased stocks for sale, market prices go lower, so people have to sell more stocks to get the same money. And so on.
That moment is fast approaching. It’s been 12 years since the 2008 crash. That’s one of the longer stretches between crashes since 1900.
To all venture capitalists and others with too much money on their hands:
My company is called ToiletShare – we sublet time-share toilets to techies. After all, you can’t “function” without toilets!
Our innovative, cutting edge, high tech idea is – most of the time, toilets are sitting unoccupied. What if instead of paying for toilet-time you don’t use, you simply paid for a block of toilet time that you and your employees could use at your discretion?
ToiletShare maintains a worker-friendly environment, with quality reading material and relaxing muzak.
Bonus – ToiletShare monitors all toilet-related activity and provides a complete monthly report of employee toilet usage.
For these businesses, when hard times hit, they have to tighten their belts. Maybe they have to repay debt. People are laid off.
But they survive.
Ponzi Turns Green
Debt Zombies have a different balance sheet. For Uber, Lyft, Pelaton, Spotify – and possibly for the secretive Amazon, Google, and Facebook (none of which pays a dividend on its inflated stock) – debt is not simply good finance.
It’s a lifeline.
Charles Ponzi must be green with envy. Or mould. Or maybe both.
Ponzi actually had to convince investors that he had a money-making scheme (by buying US postal coupons in Italy and shipping them back to the US for cash-in, producing a small net profit on each transaction).
The scheme was probably unprofitable once you factored in labor, and in any case Ponzi simply lied about the transactions. Promising huge dividends, he paid early investors with money obtained from later investors, giving his name to the classic sucker’s game, the Ponzi Scheme.
Expect to hear talk of the benefits of negative interest rates (a last-ditch effort that has never done more than keep a flaccid economy afloat – cf Japan since 1990).
And expect a major bout of inflation in the near future. It’s impossible to pump so much “cash” into completely non-productive sinkholes without producing inflation.
Capital Bids Adieu to the Zombies
As far as prevention, forget it. All the Trump/Fed cuts are doing is delaying the inevitable.
Capitalist recessions are not avoidable. They are not even a problem for the larger system. They’re a cleansing mechanism – the way the system wipes away moribund and redundant businesses. (See Recession link below for more.)
The global system has been teetering on the edge a year or more. China has been in a slump for two years. Europe is staggering to realign. Russia is a corrupt , decadent police state. India and Brazil, for all their efforts, aren’t going to make up the difference.
Capitalism in its cyclical splendor will soon wipe the debt zombies away. One or two might pick up the pieces and slowly become viable. Some (like Spotify) will be bought by bigger players.
Most will become punchlines of depressing jokes – “Remember when investors poured billions into subscription exercycles?”
What Do We Do?
We can’t prevent this crash. Nor can we prevent the knock-on effects it will have on millions of working people, who will lose jobs and income as the economy contracts.
What we can do is prepare for a major recession.
Prepare to live more modestly. Prepare to help one another. Prepare to value people more than possessions.
Prepare to ride your exercycle without a subscription.
Prepare to take back our cities. Prepare to squat vacant housing. Prepare to make cities a place we live, not the plaything of speculators.
Let’s go further – imagine a city with no cars – let alone robot-driven Uberlyfts.
Whether it’s car companies, music streaming services, or fast food – capitalism has a tendency to overproduce.
Left unchecked – or propped up by irresponsible interest-rate and tax-cut policies – we’d soon drown in ride-sharing services, music streaming sites, and exercycles.
It’s as if the whole system has gone on a giant binge.
Capitalism Purges Itself
But as our beloved if somewhat crotchety ancestor Karl Mark noted, capitalism has a built-in safety device. At the peak of over-production, companies get overstocked warehouses (can you say China 2020?), too many fast-food franchises (your home town?), etc.
Companies slash prices, selling below cost, taking anything just to get some cash flow.
Some survive, some hit the wall. A quick look at the US auto industry shows the results. Where there were once twenty or more auto companies, by 1960 there were basically three. The others hit the wall during recessions.
That was a disaster for investors, for workers, for the home communities. But for capitalism as a whole, it was a blessing.
Think of it as a cleansing. A purge. Like a giant dose of Ex-Lax for what ails the system.
It gets shit moving again, so to speak.
It Works – Unless We Decide Otherwise
It works. Depressions in the 1890s, 1930s, and 1980s eliminated vast amounts of excess production. Hundreds of factories closed. Thousands were thrown out of work and onto the streets
But in the end, capitalism got on just fine.
We escaped recent crashes in 1989, 1999, and 2008 by lowering interest rates and cutting taxes. This time, we’ve already used up those options.
The next crash will be long and ugly. But unless we specifically decide otherwise, history will repeat itself. Capitalism will get on just fine.
Am I the only one that gets these bright, cheery underwear ads on the home page of my favorite pop-news website? Little pictures of the midsections of svelte young models wearing tight, colorful briefs.
The JPGs alternate in what old-school binarists would label a male/female pattern, which bothered me at first. But in my experience there are no hard and fast boundaries about who wears what undies, so I’ll give them the benefit of the doubt on that count.
Capital is one of the half-dozen most important economic texts of the past 200 years – and perhaps the most readable. Volume One contains the key material. How great to settle into a good reading.
Marx takes the labor theory of value as developed by Adam Smith and others and shows its implications for workers, managers, and owners – a worthy goal, and critical reading for anyone interested in economics regardless of your outlook.