Tuesday, September 26, 2017

Our Crazy-Making, Profiteering Education-Career Maze

The answer is not another $1 trillion in student loan debt to pay for another raft of declining-value credentials.
So let's say we want to set up a system to help students choose a career that fits their aptitudes and interests. What would we do? How about:
1. Give them zero (or superficial) aptitude and career-related tests.
2. Provide a few minutes with a counselor who knows nothing about them, their aptitudes or potential career-related interests.
3. Design the high school education system to provide near-zero knowledge of finance, debt, economics, how the economy functions and what the world of work demands of workers.
4. Denigrate (subtly or directly) non-college career options, channeling those who aren't sure into 4-year colleges, higher education paid with student loans designed to maximize profiteering.
5. Force them to choose a major or field of study at 17 or 18 years of age, despite their lack of real-world experience and objective knowledge of how the economy functions and their own aptitudes/character traits.
6. Disconnect this higher education from real-world work places so they exit higher education with little actual knowledge of the skills employers need.
7. When the student graduates after borrowing a fortune and discovers their diploma has low value in the marketplace or is in a field they've found they loathe, then suggest the "solution" is to borrow another fortune and invest more years in obtaining another credential.
This is the American education-career maze--ineffective, self-defeating, wasteful, irrational, and apparently designed to maximize student confusion, poor choices and profiteering by higher education and the student-loan racketeers.
As if this wasn't bad enough, what do we decide to teach our students if careers might be significantly different in 10 or 20 years? Yes, math, the basics of science and communication skills will remain useful as a foundation, but these basics aren't enough to prepare students for a fast-changing emerging economy/4th Industrial Revolution.
Clearly, it would be enormously beneficial to teach the skills needed to learn on one's own and adapt successfully to changing circumstances. The current system is a hierarchy of credentialing that enriches those dispensing and funding the credentialing.
Our system's response to those left behind, those with inadequate skills and those who chose unwisely is always: get another credential, at enormous expense. Nobody tells students that credentials are in over-supply and are therefore losing their value.
Value and profits flow to what's scarce and in demand. Trying to reach the top of the credential pyramid is a crowded race, and the losers are left with debt and wasted years they could have spent actually learning useful knowledge bases and skills--in effect, pursuing a self-directed path of accrediting yourself.
The education-career maze doesn't have to be so self-defeating, costly, convoluted or ineffective. My book The Nearly Free University and the Emerging Economy lays out a model of higher education based on workplace apprenticeships in all fields, from carpentry to chemistry to sociology, from Day One, a structure that dramatically lowers costs while providing an education based on real-world acquisition and use of knowledge and skills in the workplace, not sitting in a chair watching a lecture.
Technology is a core part of improving results while lowering costs by 90%. Consider this article: Imagine how great universities could be without all those human teachers.
I describe the process of accrediting yourself in my book Get a Job, Build a Real Career and Defy a Bewildering Economy, which also details the eight essential skills needed to navigate the emerging economy.
What's the emerging economy/4th Industrial Revolution? It's not so much the replacement of human labor by robots as the augmentation of human skills with technology, and the focus on a simple but profound source of value creation: what's scarce and in high demand? What's abundant and not in demand?
The point of my book is to lay out a pathway of learning how to learn on our own and acquiring the soft skills needed to collaborate, communicate and manage teams/projects effectively, regardless of the field of endeavor.
How can we expect young students with little life experience to choose wisely when they don't even understand how the economy works? The current education-career maze assumes that some basic math and science knowledge is all students need to figure out their role in a fast-changing economy that they don't even understand.
The inadequacy of our crazy-making education-career maze boggles the mind.We need to do much, much better, not just for our students but for our society. The answer is not another $1 trillion in student loan debt to pay for another raft of declining-value credentials. We need a new system, and fast. Solutions abound, but not within the current crazy-making education-career maze.
Here's a snapshot of the workforce's education level:
Even the most credentialed workers' earnings have stagnated:
And here's your wunnerful federal government, enforcing debt-serfdom on college students to maximize the profits of the student-loan racket:



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Sunday, September 24, 2017

You Can Only Choose One: Cheap Oil or a Weak Dollar

When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.
Glance at this chart of the trade-weighted U.S. dollar, and note the swing highs and lows in the price of oil per barrel around each peak and trough. You can look up historical inflation-adjusted prices of oil in USD on this handy chart: Crude Oil Prices - 70 Year Historical Chart (macrotrends.net)
The correlation isn't perfect, of course. Oil was relatively cheap between 1986 and 2003, due to a relative abundance of supply as Saudi Arabia and new fields ramped up production, with two periods of extreme price action: a brief spike higher in 1990 preceding the First Gulf War, and a collapse to $17 in the 1998 Asian Contagion financial crisis.
Geopolitical crises, wars and supply shocks will move oil prices regardless of the value of the USD. That said, it's clear that absent such shocks, there is a strong correlation between a stronger USD and lower oil prices (in USD of course) and a weaker dollar and higher oil prices.
The reason why is straightforward: if the dollar gains purchasing power against other currencies, it buys more oil for each dollar.
Conversely, when the USD weakens, its purchasing power declines and it takes more USD to buy an imported barrel of oil.
(Note that the price of domestically produced oil is largely set on the global marketplace. West Texas crude oil may be a few dollars less per barrel than Brent crude oil, but if the global price skyrockets, so does the price of US-produced crude.)
Since oil and gas are the essential resources of the industrial economy, the price paid by consumers and commercial users matter.
The one way the US can get an across-the-board global discount on oil is to push the purchasing power of the USD higher. That is an enormous benefit that few commentators ever mention. Instead, pundits talk about the benefits of a weaker dollar, which boil down to lower priced exports.
Which matters most to households and enterprises? A tiny blip higher in exports (a relatively modest slice of the U.S. economy) or lower energy prices at the pump?
If a recession were to pressure household budgets, the one sure way to lower household spending on oil/gasoline would be to strengthen the USD.
There are two basic mechanisms that strengthen the USD: raise interest rates, so global capital flows to USD-denominated debt to earn the higher yield, or a global financial crisis which causes global capital to seek the relative safe haven of the USD.
In a global crisis, liquidity and credit will dry up, and all those non-US debtors holding the $11 trillion in USD-denominated debt I mentioned on Friday will be scrambling for USD to service their debts. This will also increase demand for USD, pushing the USD higher.
The Federal Reserve insists that yields must remain near-zero or the economy will collapse. Americans paying 15% to 23% interest on their credit cards haven't seen any benefit from near-zero rates, nor have student-loan debtors. The real beneficiaries of low yields are financiers, banks and corporations which borrow immense sums for next to nothing. (Try finding a credit card with a 1% or 2% interest rate.)
At some point, the price of oil might start mattering to households and businesses. Note that the discoveries of oil are now a thin slice of annual consumption. As the cheap oil is depleted, what's left is the costlier-to-extract stuff.
Even more alarming, the global supply of oil might fall well below global demand, and stay there.
When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.


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Thursday, September 21, 2017

The Demise of the Dollar: Don't Hold Your Breath

So let's look at currency flows, reserves and debt.
The demise of the U.S. dollar has been a staple of the financial media for decades. The latest buzzword making the rounds is de-dollarization, which describes the move away from USD in global payments.
De-dollarization is often equated with the demise of the dollar, but this reflects a fundamental misunderstanding of the currency markets.
Look, I get it: the U.S. dollar arouses emotions because it's widely seen as one of the more potent tools of U.S. hegemony. Lots of people are hoping for the demise of the dollar, for all sorts of reasons that have nothing to do with the actual flow of currencies or the role of currencies in the global economy and foreign exchange (FX) markets.
So there is a large built-in audience for any claim that the dollar is on its deathbed.
I understand the emotional appeal of this, but investors and traders can't afford to make decisions on the emotional appeal of superficial claims--not just in the FX markets, but in any markets.
So let's ground the discussion of the demise of the USD in some basic fundamentals. Now would be a good time to refill your beverage/drip-bag because we're going to cover some dynamics that require both emotional detachment and focus.
First, forget what currency we're talking about. If the USD raises your hackles, then substitute quatloos for USD.
There are three basic uses for currency:
1. International payments. This can be thought of as flow: if I buy a load of bat guano and the seller demands payment in quatloos, I convert my USD to quatloos--a process that is essentially real-time--render payment, and I'm done with the FX part of the transaction.
It doesn't matter what currency I start with or what currency I convert my payment into to satisfy the seller--I only hold that currency long enough to complete the transaction: a matter of seconds.
If sellers demand I use quatloos, pesos, rubles or RMB for those few moments, the only thing that matters is the availability of the currency and the exchange rate in those few moments.
2. Foreign reserves. Nation-states keep reserves for a variety of reasons, one being to support their own currency if imbalances occur that push their currency in unwanted directions.
The only nations that don't need to hold much in the way of currency reserves are those that issue a reserve currency--a so-called "hard currency" that is stable enough and issued in sufficient size to be worth holding in reserve.
3. Debt. Everybody loves to borrow money. We know this because global debt keeps rising at a phenomenal rate, in every sector: government (public), corporate and household (private sectors).(see chart below)
Every form of credit/debt is denominated in a currency. A Japanese bond is denominated in yen, for example. The bond is purchased with yen, the interest is paid in yen, and the coupon paid at maturity is in yen.
What gets tricky is debt denominated in some other currency. Let's say I take out a loan denominated in quatloos. The current exchange rates between USD and quatloos is 1 to 1: parity. So far so good. I convert 100 USD to 100 quatloos every month to make the principal and interest payment of 100 quatloos.
Then some sort of kerfuffle occurs in the FX markets, and suddenly it takes 2 USD to buy 1 quatloo. Oops: my loan payments just doubled. Where it once only cost 100 USD to service my loan denominated in quatloos, now it takes $200 to make my payment in quatloos. Ouch.
Notice the difference between payments, reserves and debt: payments/flows are transitory, reserves and debt are not. What happens in flows is transitory: supply and demand for currencies in this moment fluctuate, but flows are so enormous--trillions of units of currency every day--that flows don't affect the value or any currency much.
FX markets typically move in increments of 1/100 of a percentage point. So flows don't matter much. De-dollarization of flows is pretty much a non-issue.
What matters is demand for currencies that is enduring: reserves and debt.The same 100 quatloos can be used hundreds of times daily in payment flows; buyers and sellers only need the quatloos for a few seconds to complete the conversion and payment.
But those needing quatloos for reserves or to pay long-term debts need quatloos to hold. The 100 quatloos held in reserve essentially disappear from the available supply of quatloos.
Another source of confusion is trade flows. If the U.S. buys more stuff from China than China buys from the U.S., goods flow from China to the U.S. and U.S. dollars flow to China.
As China's trade surplus continues, the USD just keep piling up. What to do with all these billions of USD? One option is to buy U.S. Treasury bonds (debt denominated in dollars), as that is a vast, liquid market with plenty of demand and supply. Another is to buy some other USD-denominated assets, such as apartment buildings in Seattle.
This is the source of the petro-dollar trade. All the oil/gas that's imported into the U.S. is matched by a flow of USD to the oil-exporting nations, who then have to do something with the steadily increasing pile of USD.
Note what happens to countries using gold as their currency when they run large, sustained trade deficits. All their gold is soon transferred overseas to pay for their imports. So any nation using gold as a currency can't run trade deficits, lest their gold drain away.
Nations aspiring to issue a reserve currency have the opposite problem. They need enough fresh currency to inject into the global FX markets to supply those wanting to hold their currency in reserve.
This means any nation running structural trade surpluses will have difficulty issuing a reserve currency. Nations shipping goods and services overseas in surplus end up with a bunch of foreign currencies--whatever currencies their trading partners issue. This is opposite of the global markets need, i.e. a surplus (supply) of the reserve currency.
Any nation that wants to issue a reserve currency has to emit enough currency into the global economy to supply the demand for reserves. One way to get that currency into the global system is run trade deficits, as the world effectively trades its goods and services in exchange for the currency.
A reserve currency cannot be pegged; it must float freely on the global FX exchange. China's currency, the RMB, is informally pegged to the USD; it doesn't float freely according to supply and demand on global FX markets.
Nobody wants to hold a currency that can be devalued overnight by some central authority. The only security in the realm of currencies is the transparent FX market, which is large enough that it's difficult to manipulate for long.
(Global FX markets trade trillions of dollars, yen, RMB and euros daily.)
This is why China isn't keen on allowing its currency to float. Once you let your currency float, you lose control of its exchange rate/value. The value of every floating currency is set by supply and demand, period. No pegs, no "official" rate, just supply and demand.
If traders lose faith in your economy, your ability to service debt, etc., your currency crashes.
So let's look at currency flows, reserves and debt. In terms of currencies used for payments, the euro and USD are in rough parity. Note the tiny slice of payments made in RMB/yuan. This suggests 1) low demand for RMB and/or 2) limited supply of RMB in FX markets.
The USD is still the dominant reserve currency, despite decades of diversification. Global reserves (allocated and unallocated) are over $12 trillion. Note that China's RMB doesn't even show up in allocated reserves--it's a non-player because it's pegged to the USD. Why hold RMB when the peg can be changed at will? It's lower risk to just hold USD.
While total global debt denominated in USD is about $50 trillion, the majority of this is domestic, i.e. within the U.S. economy. $11 trillion has been issued to non-banks outside the U.S., including developed and emerging market debt:
According to the BIS, if we include off-balance sheet debt instruments, this external debt is more like $22 trillion. FX swaps and forwards: missing global debt?
Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing.
The debt remains obscured from view. Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity. Only footnotes to the accounts report it.
Focusing on the dominant dollar segment, we estimate that non-bank borrowers outside the United States have very large off-balance sheet dollar obligations in FX forwards and currency swaps. They are of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet debt.
So let's wrap this up. To understand any of this, we have to start with Triffin's Paradox, a topic I've addressed numerous times here. The idea is straightforward: every currency serves two different audiences, the domestic economy and the FX/global economy. The needs and priorities of each are worlds apart, so no currency can meet the conflicting demands of domestic and global users.
So if a nation refuses to float its currency for domestic reasons, it can't issue a reserve currency. Period.
If a nation runs trade surpluses, it has few means to emit enough currency into the FX market to fulfill all three needs: payment, reserves and debt.
As for replacing the USD with a currency convertible to gold: first, the issuer would need to emit trillions for the use of its domestic economy and global trade (let's say $7 trillion as an estimate). Then it would need to issue roughly $6 trillion for reserves held by other nations, and then another $11 trillion (or maybe $22 trillion) for those who wish to replace their USD-denominated debt with debt denominated in the new gold-backed currency.

So that's at least $24 trillion required to replace the USD in global markets, roughly three times the current value of all the gold in existence. Given the difficulty in acquiring more than a small percentage of available gold to back the new currency, this seems like a bridge too far, even if gold went to $10,000 per ounce.
Personally, I would like to see a free-floating completely convertible-to-gold currency. Such a currency need not be issued by a nation-state; a private gold fund could issue such a currency. Such a currency would fill a strong demand for a truly "hard" currency. The point here is that such a currency would have difficulty becoming a reserve currency and replacing the USD in the global credit market.
Issuing a reserve currency makes heavy demands on the issuing nation. Many observers feel the benefits are outweighed by the costs. Be that as it may, the problem of replacing the USD in all its roles is that no other issuer has a large enough economy and is willing to shoulder the risks and burdens of issuing a free-floating currency in sufficient size to meet global demands.
Of related interest:
The Fed's Global Dollar Problem Borrowers around the world have gone on a dollar binge. This makes them vulnerable when interest rates rise. 


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Wednesday, September 20, 2017

Loving Our Debt-Serfdom: Our Neofeudal Status Quo

Democracy (i.e. political influence) and ownership of productive assets are the exclusive domains of the New Aristocracy.
I have often used the words neoliberal, neocolonial and neofeudal to describe our socio-economic-political status quo. Here are my shorthand descriptions of each term:
1. Neoliberal: the commoditization / financialization of every asset, input (such as labor) and output of the economy; the privatization of the public commons, and the maximizing of private profits while costs and losses are socialized, i.e. transferred to the taxpayers.
2. Neocolonial: the exploitation of the domestic populace using the same debt-servitude model used to subjugate, control and extract profits from overseas populations.
3. Neofeudal: the indenturing of the workforce via debt and financial repression to a new Aristocracy; the disempowerment of the workforce into powerless debt-serfs.
Neofeudalism is a subtle control structure that is invisible to those who buy into the Mainstream Media portrayal of our society and economy. This portrayal includes an apparent contradiction: America is a meritocracy--the best and brightest rise to the top, if they have pluck and work hard-- and America is all about identity politics: whomever doesn't make it is a victim of bias.
Both narratives neatly ignore the neofeudal structure which disempowers the workforce in the public sphere and limits the opportunities to build capital outside the control of the state-corporate duopoly.
The book The Inheritance of Rome: Illuminating the Dark Ages 400-1000 shed some light on the transition to a feudal society and economy. While the author is a fine writer, the subject matter doesn't lend itself to light reading. The transition from the Roman legacy of centralized governance (empire, monarchy, theocracy, etc.) to feudalism (governance by local lords / aristocracy) was complex and uneven, and the author takes pains to describe the process and many variations that arose in a highly fragmented post-Roman Europe.
(Note that the Eastern Roman Empire, a.k.a. Byzantine Empire, endured until 1453 AD. I've written often on both the western and eastern Roman empires: The "Secret Sauce" of the Byzantine Empire: Stable Currency, Social Mobility (September 1, 2016)
Don't Diss the Dark Ages (October 26, 2016)
Neofeudalism is not a re-run of feudalism. It's a new and improved, state-corporate version of indentured servitude. The process of devolving from central political power to feudalism required the erosion of peasants' rights to own productive assets, which in an agrarian economy meant ownership of land.
Ownership of land was replaced with various obligations to the local feudal lord or monastery--free labor for time periods ranging from a few days to months; a share of one's grain harvest, and so on.
The other key dynamic of feudalism was the removal of the peasantry from the public sphere. In the pre-feudal era (for example, the reign of Charlemagne), peasants could still attend public councils and make their voices heard, and there was a rough system of justice in which peasants could petition authorities for redress.
Of course peasants usually lost to the aristocracy and monasteries, but at least the avenue of redress was at least partially open. This presence in the public sphere was slammed shut in feudalism.
From the capitalist perspective, feudalism restricted serfs' access to cash markets where they could sell their labor or harvests. The key feature of capitalism isn't just markets-- it's unrestricted ownership of productive assets--land, tools, workshops, and the social capital of skills, networks, trading associations, guilds, etc.
Our system is Neofeudal because the non-elites have no real voice in the public sphere, and ownership of productive capital is indirectly suppressed by the state-corporate duopoly. Various studies have found that politicians ignore the bottom 99.5% who don't contribute to their campaigns or crony-capitalist wealth (five quick speeches for $200,000 each is $1 million. Rinse and repeat.)
The vast majority of incumbents are re-elected, as they leverage their power to vacuum up enormous sums of campaign contributions that then buy the compliance of a cowed public.
As for ownership of assets-- small business startups have been crushed by soaring costs, heavy regulations and the dominance of cartels and quasi-monopolies enforced by the state.
Income growth is now the exclusive domain of the Financial Aristocracy:
The so-called middle class owns little to no productive capital; what it "owns" is a house, which is ultimately a form of consumption. I say "owns" for two reasons: one, most households have a mortgage, so their ownership is still contingent on making monthly payments to a lender, and two, the government collects property taxes on the home regardless of the owner's income or ability to pay.
Compare this to taxes levied on business income: if the business has no net income, it owes no taxes. Not so with property taxes--they are the modern equivalent of "rent" paid to the feudal lord.
Note that the aristocracy owns productive assets while the serfs own housing and debt. This is not a flaw in the system, it's a feature of the system.
Democracy (i.e. political influence) and ownership of productive assets are the exclusive domains of the New Aristocracy. This is Neofeudalism in a nutshell.
"Under a scientific dictator education will really work -- with the result that most men and women will grow up to love their servitude and will never dream of revolution."
"The nature of psychological compulsion is such that those who act under constraint remain under the impression that they are acting on their own initiative. The victim of mind-manipulation does not know that he is a victim. To him, the walls of his prison are invisible, and he believes himself to be free. That he is not free is apparent only to other people. His servitude is strictly objective."
Aldous Huxley
source of quotes (read the entire thread)


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