Who Should Young People Throw Under the Bus: Granny or Billionaire Hedgie Stan Druckenmiller?

I pointedly avoid New York Times columnist Thomas Friedman; you can glean everything you need to know about him from the official Thomas Friedman Op/Ed Generator or some of Matt Taibbi’s lambastings (see here, here, and here for examples).

So without attempting to wade too deeply into the goo of Friedman’s latest column, let’s limit ourselves to the the fact that Friedman is running PR for former Soros Fund Management lead investor Stan Druckenmiller. The column also serves to illustrate how Serious People like Friedman were ready to jump on the deficit cutting bandwagon once the shutdown/debt ceiling drama was put to rest for a bit.

Druckemiller’s latest cause is to foment generational warfare. He’s going to college campuses and telling students that things suck (which they know full well) and they need to go after Boomers who are gonna get too much in entitlements if things don’t change. Now from what I can infer, the presentation is sophisticated, since Druckenmiller throws other big Federal spending items into the mix, like defense. But the fact that he depicts tax rates as a problem is a major tell.

Curiously, for someone who says he’s a friend of Druckenmiller, Friedman is remarkably circumspect about Druckemniller’s political history. Druckemniller has not only been one of two or three biggest Republican donors for the better part of two decades, he’s been firmly aligned with the aggressive “shrink government/cut taxes” effort, back to being a strong ally of Newt Gingrich. For Druckemmiller to point at Boomers and act as if he’s part of the solution, as opposed to one of the long-standing proponents of tax cuts, which among other things were one of the big causes in the rise in government debt levels under George Bush, is remarkably disingenuous.

Similarly, Friedman mentions in passing Druckenmiller’s successful bet against subprime as a reason to take him seriously. As we discussed in ECONNED at length, the supbrime shorts, most importantly Magnetar, were what turned what would have been a S&L level housing crisis into a global financial meltdown. The use of credit default swaps on subprime mortgages created exposures that have been estimated at 5-6 times that of the value of mortgages. The synthetic side bets were a multiple of the real economy borrowings. As we explained in 2010:

The current number one non-fiction best seller, Michael Lewis’ The Big Short: Inside the Doomsday Machine…Lewis’ tale is neat, plausible to a mass market audience fed a steady diet of subprime markets stupidity and greed, and incomplete in critical ways that render his account fundamentally misleading….

Lewis repeatedly and incorrectly charges that no one on Wall Street, save his merry band of shorts, understood what was happening, because everyone blindly relied on ratings and failed to make their own assessment. By implication, the entire mortgage industry ignored the housing bubble and the frothiness of the subprime market. This is simply false (although with Bernanke and the persistently cheerleading US business media largely missing this story at the time, the “whocouldanode” defense is treated more seriously than it should be). Many people in the credit markets were aware that the risks were increasing in the subprime and residential real estate markets. Every mortgage industry conference during this period had panels on this topic, every credit committee considered it throughout 2005-07…

Lewis completely ignores the most vital player, the one who was on the other side of the subprime short bets. The notion that “it’s a CDO” is daunting enough to stop the non-financial reader in his tracks. The author is remarkably uncurious about who the end investors were for CDOs.

Listen up. Who really was on the other side of the shorts’ trades is the important question. And the section in which Lewis finally gets around to that (more than halfway thought the book, reader sympathies to his key actors now firmly established) hides the fundamental flaw in his narrative in plain sight:

…whenever Eisman sets out to explain the origins of the subprime crisis, he’d start with his dinner with Wing Chau [a CDO manager]. Only now did he fully appreciate the central importance of the so-called mezzanine CDO – the CDO composed mainly of BBB rated subprime mortgage bonds – and its synthetic component, the CDO composed entirely of credit default swaps on triple-B rated subprime mortgage bonds. “You have to understand this,” he says. “This was the engine of doom.”…

All by himself, Chau generated vast demand for the riskiest slices of subprime mortgage bonds. This demand had led inevitably to the supply of new home loans, as material for the bonds.

Yves here. It wasn’t all by himself, as we will see soon:

….the sorts of investors who handed money to Wing Chau, and thus bought the triple A rated traches of CDOs – German banks, Taiwanese insurance companies, Japanese farmer’s unions, European pension funds, and in general, entities more or less required to invest in AAA rated bonds -did precisely so because they were supposed to be foolproof, impervious to losses, and unnecessary to monitor of think about very much.

Yves again. Note that these are the international equivalent of widows and orphans, but because they are exotic, presumably elicit less sympathy. But as we will discuss soon, by this point in the tale, January 2007, that list of prototypical chumps was out of date, which has further implications for the real significance of this trade.

Starting in mid-2005, when the creation of a standardized credit default swap on mortgages made it feasible to take large subprime short positions, a system quickly developed that overrode the normal checks and balances of the market and allowed the unscrupulous to 1. Profit from making bad loans, and 2. Force the creation of more bad loans, which would both increase their profits and make it more likely that their bet would be successful…

The subprime market would have died a much earlier, much less costly death absent the actions of the men Lewis celebrates. They didn’t simply keep the market going well past its sell-by date, they were the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages. His “heroes” were aggressively trying to find toxic waste to wager against. But unlike short positions in heavily-regulated equity markets, these wagers, the credit default swaps, had real economy effects. The use of CDOs masked the nature of their wagers and brought unwitting BBB protection sellers to the table, which lowered CDS spreads (and as in corporate bond markets, CDS dictate, via arbitrage, interest rates for bond issues) and pushed down the interest rates on the cash bonds backed by those same loans, which in turn made it perversely attractive for lenders to generate mortgages with the worst characteristics. And it isn’t surprising that weak-credit borrowers were enticed by this once in a lifetime “opportunity”.

Back to the current post. So why are the young people Druckeniller trying to incite against their elders in such terrible shape? There’s an immediate factor and a longer-term trend. The immediate one is the aftermath of the global financial crisis, which has produced disastrously high levels of unemployment for the young, particularly college graduates. And Druckemmiller doesn’t bear some vague general guilt as a member of the financial services industry that emerged more powerful as a result of this event; he actually bears considerably more responsibility than most by having taken out huge bets against subprime that drove demand to the worst sort of mortgages and had way too many fragile, levered, critically positioned financial institutions on the wrong side of the trade. For instance, on of the parties on the other side of Druckenmiller-style bets were monolines. When they went seen as being at risk, the auction rate securities market froze because monolines were also guarantors of municipal bonds, and everyone knew this short-term muni paper would fall in value as the monolines were downgraded. The result was that interest rates jumped to the parties that had issued this paper, helping to wreck the budgets of cities and transit authorities. That’s only one example of the many sorts of collateral damage that resulted from the remarkably lucrative subprime short bet.

And if you widen the frame, this country has been through a protracted and successful campaign to revise the social contract to favor capital over labor. You can see its success in the accelerating rise in income inequality, the lack of economic mobility, and the huge corporate profit share. Warren Buffet claimed that a level of over 6% of GDP wasn’t sustainable; depending on how you measure it, it’s currently at over 10%, some peg it as high as 12%. That rise in corporate profit share has come at the expense of employment and wage growth. The policy shift started under Carter, but the old model of having companies share the benefit of productivity gains and basing overall prosperity on wage growth was abandoned in the Reagan/Thatcher era for one that favored asset price growth and used rising levels of consumer leverage to mask stagnant wages. Druckenmiller was a huge backer of the politicians that promoted those programs. Yet he has the temerity to try to turn young people against ordinary folks in their 50s and 60s, most of which who never had any political influence, when he was a major sponsor of the very policies that have helped impoverish American youth. Perhaps Druckenmiller is making such an aggressive and public disinformation tour because he knows that if young people were to turn on the old, he’d be one of the most deserving targets for their vengeance.

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  1. Bapoy

    Think you have a typo. This should read, the country is on a path to grow government dependency. A quick look at entitlement chart shows that.

    Corporations dont just give raises because they are trying to be nice, they do when they compete for labor. Given the growth in entitlements and other regulations (unions, right to work), there is little demand for work and it wont come back. Corporations are automating because even that is cheaper.

    The solution is simple, let markets work. Let the cost of labor drop by removing collective bargaining, while also allowing financial markets to return to normal by removing QE.

    1. Yves Smith Post author

      Untrue. Total government spending to GDP is at the same level as 1980 with a much higher level of military spending now.

      And we’ve debunked the CBO forecasts:



      Unions are a much smaller % of the total workforce than in the 1980s as well, down IIRC from roughly 20% to just over 11% now:


      So everything you said was false and you accuse me of typos?

      Don’t try running made up right wing talking points here. They don’t go over very well.

      1. Bapoy

        Oh do come on Yves.

        How could spending not be at same level compared to GDP when spending is part of GDP? Convinient, isn’t it?

        This is not about wing, it’s about being able to add and divide. Why dont we look at real GDP?

        To the others, free markets do exist. Talking to a very good friend yesterday, in his country a business association would hold lotteries to allow shops to remain open during holiday, the association would than bribe the authorities to leave the shop alone. This is what a lot of these regulations do, they create criminals out of working poor people. Are these shop keepers not contributing to society?

        It’s not about how many people are in unions, it’s about the abuse of power for the good of a few at the expense of everyone else. Tax payers are representative of the community, unions are not.

        I can guarantee with a doubt that the market will resolve this. Either we let the market work or the wheel will hit the road at full speed. The young and stupid may be easily coersed with goodies, like OWS and Tea Party, you lose that ability and you will have to deal with their testosterone in the streets. There will be free markets once again, it’s just a matter of time.

        1. centerfielddj

          What does it feel like to be a sociopathic monster?

          I’m sorry, I forgot; your fantasies have destroyed your ability to feel any emotions other than hostility, fear and anger. That shows up in your posts.

          What happens to the hundreds of millions of Americans in your preferred sunken labor market? Doesn’t sound like you want to leave them enough money for cake.

    2. used to be one myself

      Bapoy –
      I’m glad you are on this site. Believe me, I used to think exactly what you wrote. It would be so nice to think that we could just default to market wisdom and everything would be ok. But look around – your common sense at the very least has to be telling you that market wisdom is getting drummed. My bet is that this is why you are looking around for something or someone to make sense of what is but (as far as we have been led to believe) shouldn’t be.
      We Republicans (yep- I’m still one, but who knows for how much longer) need to WAKE UP. Contrary to what you will often read in the comments, not all GOPers are walking lockstep with the policies of the past. That is a big reason why you see so much fracture within the GOP.
      Keep reading – and then go make some converts to wisdom. You will find that here.

    3. Banger

      Let markets “work”? WTF is that? Though you did not mention it the right wing view of economics starts with the idea of “free” markets which do not, have not, and will not ever exist. Markets are always mediated by political entities and are alway fixed or weighted in favor of particular political interests. As to whether corporations choose to hire or automate I think you are right–when it is possible it makes sense to automate particularly since robotics is rapidly maturing as an industry. At some point we have to start talking about work and what it means and who should profit from it and, indeed, what is the purpose of a human being….

    4. jrs

      If anything entitlements and obviously unions improve the chances of labor getting raises. Ok unions is obvious as they directly fight for labor and to increase wages for their members. But entitlements how? Because if grandpa retires at 62 so he can collect Social Security, it means you don’t have to compete with him for a job.

    5. jrs

      I’m wondering how low the cost of labor has to drop? Are we talking Iron Law of Wages level? (ie a worker well never be paid more than *immediate* subsistance – forget a worker every accumulating any savings/capital). That’s your classical economics without the Neo.

      And if so why would anyone who works for a living want that over unions which will fight for thier wages/benefits/time off/etc.?

    6. Veri

      One could argue that the growth in entitlements is nothing more than a thinly veiled corporate subsidy that allows corporations to suppress wages. Which, in effect, entitlements allow corporations to do.

      As for right-to-work, that is a misnomer. Right-to-work is also what is promoted by Republicans, with the effect of suppressing wages and destroying worker’s ability to organize union. Right-to-work is a de-regulatory scheme by Republicans to suppress wages in favor of corporate profit. The fact that you represent right-to-work as a regulatory scheme destroys any standing you have in talking about the subject matter of the article.

      Union membership is down. A union is a different form of business structure that allows workers to organize to counter what is a legally recognized business advantage: jobs are scarce and available workers are many, thus tilting the advantage overwhelmingly to business.

      The other item about unions that sinks your Battleship is that when America was most prosperous, union membership was at its highest. The economic juggernaut that was America after WWII was powered by high taxes and high union membership. Since following the inane Reaganomics failed-paradigm, America has sunk to mediocrity and business disaster. S&L Crisis, LTCM, Tech Bubble, Housing Bubble.

      Let the markets work? Markets are not rationale. If they were, the concept of irrational exuberance would never propel bubbles.

      Cost of labor drop? Printing dollars = inflation = higher living costs. With no corresponding increase in wages to match inflation, America has no middle class.

      Your cheesy slogan regarding cost of labor is in effect saying: Make everyone poorer.

      QE? The wealthy controlled banks and hid their wealth in banks. The banks went bankrupt. No more wealthy. QE can be viewed as an attempt by the Fed to replace all the wealth in the banks that the wealthy, through their own machinations, lost.

      Yves destroyed you. Graduate of Liberty University online? You deserve ridicule for your overly simplistic slogans and talking points, only designed for the most simple, simpering minds.

    7. different clue

      Let the cost of labor drop to where? To the cost of labor in India? Bangladesh? Pakistan?

      Well . . . that was the whole point and purpose of Free Trade to begin with, so I assume that is your goal for us Americans.

    8. run75441


      This is nonsense. When has Labor been such a large component of manufacturing a product? It hasn’t since the sixties and today direct labor in manufacturing a product is 10% or less. Union membership fell to < 7% in 2011 and is still decreasing as silly states such as Michigan pass RTW laws thinking it will increase business within the state. http://www.nytimes.com/2011/01/22/business/22union.html?_r=0 Passing RTW does little or nothing to increase business in states as witnessed in states such as Oklahoma, etc.; however, it does result in decreased income for Labor overall.

      If you are going to make the argument, then go along the lines of increased Overhead resulting from direct and indirect labor. You know all of those bennies which protect you and offer you respite by giving you healthcare, vacation, holidays, etc. But then too, this is what separates the US from Labor proactices in counties such as China, Thailand, etc.

  2. from Mexico

    Thanks so much for this, Yves.

    MacroBusiness pundit Unconventional Economist also posted on Friedman’s article, but in a much more laudatory fashion:


    That a blog like MacroBusiness, which claims to offer “No nonsense analysis of the Australian and global economy,” should place its imprimatur upon Druckenmiller’s shameless quest for scapegoats does not speak well for MacroBusiness’s judgment.

    It was depressing, and the comments were even more depressing.

  3. Watt4Bob

    Add to this story, the fact that the MSM, and even Public Radio and TV never miss a chance to frame the healthcare debate as needing the participation of the young ‘in order to finance it’ and thus the mandate.

    They are pushing the meme that requiring even young people’s participation is a scam, in the same way they have encouraged the myth that the young will never see their Social Security benefits because supposedly because the boomers will have used it all up?

    Americans are a credulous people, as easily divided and misled as any colonized ‘savages’.

    1. anon y'mouse

      even if that were true, and it somewhat is given what insurance is trying to do, so what?

      tell kids this: if you want little old ladies to starve in the street, don’t fight against ending SSI and don’t sign up for insurance. if you feel that little old ladies should not starve in the street in such a society, do your part to make sure that they don’t. the young support the old because the older supported them when they were young. the young will support them when they are old. if we are all supporting each other, no one has to die in the gutter.

      hopefully the current generation is not extremely narcisstic. the ones I come across in school seem self-centered to a point, but also keenly attuned to moral arguments and many of them want to help change the world for the better. then again, they decry universally an “entitled” attitude, and i’m not sure where they got that from. perhaps they work hard, and expect others to do the same and dislike anything that subverts that.

      still, the young are hopefully not patsies unable to see how this will screw them too in the end.

      1. hunkerdown

        then again, they decry universally an “entitled” attitude, and i’m not sure where they got that from. perhaps they work hard, and expect others to do the same and dislike anything that subverts that.

        “Entitlement mentality” has been in medium rotation for several years now. If they’re paying attention (insofar as mainstream media will allow), they’ve surely heard it. Could it be the lack of humility that provokes them?

  4. skippy

    I blame it on the GPD

    However, GDP is a measure of raw economic activity, not a complete picture of economic progress. Even its chief architect, Simon Kuznets, recognized the limitations of GDP and thought it was a poor instrument for measuring economic development. GDP was never intended to become the sole measurement of the state of our economy, let alone a measure of societal progress. But in the decades after World War II, GDP has become the go-to metric for determining whether society is progressing. Our economic policy has been largely shaped by the end goal of maximizing GDP growth without consideration of what the figure does and does not measure.


    1. optimader

      Good clarifying link

      What Does It Leave Out?
      The equation: GDP = Consumption + Private Investment + Government spending + Exports – Imports

      How about failure to capture Present Cost of Future Liabilities, or however to state that correctly in EconSpeak.

      Just as an example of what I mean: China adding to the Nuclear Power fleet may be GDP growth, but their future liabilities.
      Cost for at worst CATASTROPHIC failure (malevolent of natural or just stupid (later in China = very likely)
      at best, the cost of waste stewardship and end of service life decommissioning are not factored into GDP as negative .

      so I digress:
      Going nuclear: UK’s deal with China
      “…Mr Osborne’s host, Zhang Shan Ming, the general manager of the China General Nuclear Power Group (CGN), obviously keen to stress the safety features of the reactor, was explaining why the concrete casing was so thick.
      “It’s against air traffic crash,” Mr Zhang said…”
      On the subject of Malevolent failure, containment vessels likely will not survive a direct strike from a modern commercial widebody jet, so I understand from someone who would know. And of course the Control Building for the reactor are not even in a containment vessel, so just add an hour to catastrophic failure. A point to consider.

      Interestingly, the issue of a commercial jet strike was seamlessly avoided during the Bush admin during the approval process of the Westinghouse AP1000 by treating such an impact , so hard to model, let’s just call it a “beyond design basis event”! (kinda like considering a Tsunami as a “beyond design basis event”.)
      AP1000 Design Control Document
      “..The design of AP1000 takes into account the potential effects of the impact of a large commercial aircraft. The impacting aircraft analyzed is based upon the impulse time curve provided by the NRC in July 2007. The impact of a large commercial aircraft is beyond design basis…”
      “Taken into account” but “beyond design basis” What’s not to love with this language? Run “Taken into account” through the blabblefish interpreter , it can simply mean an “Evacuation plan”! It means what ever you want it to mean. Thank-you George Orwell.
      Of course the AP1000 is a nuke plant design actively being campaigned in China.

      “…Right,” the UK chancellor replied. “Special safety procedures.”
      “An earthquake, or tsunami, or typhoon, you are prepared for that?” Mr Osborne asked.
      “The design is prepared for this,” he was told…”


      1. skippy

        GDP is the chezz (glazed apathetic leash) in the mathematically driven (living systems reductionist to binary) skinner box… McNamara was crying at the end of the doco.

        Skippy… the candy everybody wants… eh. Hay… hay… givem what they want… gotta dance now!


      2. J Sterling

        GDP is a measure of how hard everybody’s working, and it leaves out that we might want to stop working at some point, for the day, or the week, or the summer vacation. In other words, productivity is not all there is to life, which is something the Europeans, with their mandatory vacation time and capped working hours, understand.

        It also leaves out that if you add numbers of people to the system, it increases the total GDP, but reduces the mean GDP per person.

        (to explain that last, production depends on labor and the means for labor to produce. If there was an existing unused resource the new labor unit could work with, that was better than any of the means currently being used, it and not those would be being used instead already. So the marginal labor unit is put to work on a resource that until that moment was considered unproductive –> mean productivity goes down)

    2. Bapoy

      Just say it. GDP is a scam…

      Is it really ‘money’ we need or what the money buys? If it’s what the money buys, than issuing more money won’t help. Production and savings do help. And savings are nothing more than an insurance policy, 1 person with 80 billion is not the same as 6 billion with 80 billion.

      For the 1 person it’sguaranteed future spending, for the others it means higher prices and the status quo.

      The more labor unions and governments fight deflation, the bigger the crash later on. As I said, robots and automation are cheaper. How do jobs come back?

  5. Larry

    Let me add my appreciation too Yves for writing this piece. I read Fredman’s article that day and clicked on the site he provided with the video where Drunkenmiller displayed his absurd charts and co-billionaire friend Ken Langone was chanelling Alan Simpson. My head nearly exploded when in the first 20 minutes I heard them telling NYU srudents stuff that most enligghtened high schoolers would find fault with.

    It’s too bad that when Ken Langone in his frantic appeal to this generation, who he claimed was getting ripped off by “old geezers”like him, that one of those bright students didn’t stand up and ask him why he was receiving the $3800 dollars a month he said he was receiving in entitlement payments. If that student had pressed Langone, that “old geezer”, if honest, would have had to admit that he wasn;t stealing from this generation but siomply getting a partial return on his earlier investment in the system. A system by the way that had worked very well for the last 80 years.

    1. Yves Smith Post author

      Oh, I may have to find the charts and add a sequel debunking the specifics! Please provide the link. Thanks!

        1. curlydan

          OMG! Langone and his wife gets $3,500/month and decent health care. To the guillotines with them and all those other greedy geezers! This should be a point of pride, but this rich a*hole is pushing for cuts to that and corporate taxes.

          Worse yet, one of those Bloomberg TV shills (Stephanie somebody–ya know, the one whose always looking forward to her next martini) is there as well.

          If you watch this, put it your tooth guard…there’s going to be a lot of gnashing of teeth.

    2. Thisson


      The problem is that they’re not taking out a “partial return” on prior investments. Many people (although not all) are taking out sums greater than the actuarial value of their prior contributions. The fact that the system has worked very well for recipients for 80 years is neither here nor there. Madoff’s ponzi scheme worked similarly well for what, 40-50 years. It still collapsed in the end.

      1. Ed S.

        Many people (although not all) are taking out sums greater than the actuarial value of their prior contributions

        Care to provide a citation to this (and not a statement in an article)? One that has actual numbers? And not an anecdote about somebody from 1938 who paid in for 18 months, please.

        I think this “get back more than they paid in” is nothing more than propaganda.

        1. bh2

          Payouts from SS, on average, exceed pay-ins. It’s widely documented. Try Google.

          That said, SS payments are not “insurance”, thus no contractual obligation to pay any amount at all. The only obligation is that you pay the government to do as they please.

          For more than half a century, lighter than air promises of SS increases have been cynically promoted to voters by progressives to gain or retain office.

          The pols knew the math dictated by demographics must fail in the long term. However, when winning is everything, no lie can be too great. The lies always morph over time, but the lying never stops.

          1. Thisson


            When the system was set up, life expectancy was much lower, and the balance of contributions and withdrawals has not been adjusted to take this into account. Today’s retirees take out more than the actuarial value of their contributions, provided they live a few years.

            “Old age and Medicare benefits are guaranteed as a matter of right even though many recipients draw more benefits than they have paid in contributions.” – Jack Lew, Secretary of the US Treasury. Source: http://brucekrasting.com/jack-lew-on-social-security-dump-it/

  6. from Mexico

    skippy provided a link the other day to a wonderful research paper about the criminal justice industrial complex (police, courts and prisons) and its “political production of middle-class support for punative penal policies under conditions of neoliberal capitalism.”


    What the “political production of middle-class support” essentially boils down to is a hunt for — the naming and blaming of — scapegoats. What I found most interesting about the paper is the discussion of what makes a workable or successful scapegoat. And while “criminals” may make great scapegoats, I just don’t see grandpa and grandma fitting the bill.

    The author of the paper, Leonidas K. Cheliotis, has an entire section on “suitable threats” and “suitable enemies.” One requirement of a “suitable enemy” is that “it can be given a familiar face, as when mugging is linked to young Black males.” A “constructred succession of taints” is projected upon the scapegoat — “irresponsibility and laziness, to criminal propensity, to reduced morality.” So are you beginning to see the problem our neoliberal overlords have here with making grandma and grandpa the “dangerous other”? Can you imagine your (white) granny out there robbing people at gun point? Grandpa raping all the young white virgins?

    Also suitable “scapegoats need to issue from ‘a minority that is sufficiently helpless to lend itself as an object for narcissistic satisfaction’.” And as Cheliotis goes on to explain, “the helplessness of scapegoats is generally to be conceived in socio-economic terms” so that “governing elites in the case at issue manage to twist yet another complication of neoliberalism to their own advantage, here laying responsiblity squarely on the backs of people whom neoliberal socio-economic policies have kept or pushed into the most disadvantaged positions in society.”

    But when it comes to political helplessness, I don’t see old folks fitting that bill either. Old people are not known to roll over and play dead, at least not the old folks I’ve known in my lifetime.

    There’s more, but hopefully one gets the idea.

    The need for scapegoats is not only great, but growing rapidly as the devastation wrecked by neoliberalism comes home to roost. The attempt to scapegoat old folks, despite their inappropriateness for such a project, strikes me as an act of desperation.

    1. skippy

      That’s all neoliberalism – means – to me today, what I’ve seen in books and theory, in the web sites I battle on, and on the streets.

      It is a temple of feted old anti social ideologues that project their filth upon everything.

      Skippy… as you break down their reductionist phlisophical quasi – science… you can see them devolve into their true state… as they project every fault of their own at you… until they can only mutter… LAIR!!! LAIR!!!

      PS. I think I’m up to over a hundred of those conversations archived now, some name of note too – snicker~

  7. TomDority

    “But the fact that he depicts tax rates as a problem is a major tell.”
    —- Tax rates should be raised on economically destructive activities, to the point of drowning them in a bathtub – and that revenue be used for public purpose. He contributes so much to the anti-tax meme because he knows this is his achillies heel. This is the mechanism he uses to steal the wealth that others created.

    “Druckemniller has not only been one of two or three biggest Republican donors for the better part of two decades, he’s been firmly aligned with the aggressive “shrink government/cut taxes” effort, back to being a strong ally of Newt Gingrich.”
    —Shrinking government and reducing taxes is another method of force privatizing the public domain – again, a method of stealing wealth others have created. Again, his way of making money is wealth destructive and predatory – his taxes, no matter how high, will not affect employment – he is not a job creator but spends huge sums to convince people that he is.

    “And if you widen the frame, this country has been through a protracted and successful campaign to revise the social contract to favor capital over labor.”

    Capital is favored Tax-wise over labor.

    Thanks again for your illumination Yves and your tolerance of my comments

  8. Dino Reno

    Every other word out of the mouths of every business news anchor and interviewee is “entitlement cuts” since the no default vote. This has become, contrary to the facts, the de facto responsible thing to do right now. It is presented as received wisdom, without one dissenting voice. No one questions the need for cuts short or long term to SS and Medicare among the Responsible People who will never need or miss the benefits if they are reduced. These benefits have become the crux of the nation’s problem–not endless war, endless spying or growing poverty. CEOs can’t invest, banks can’t loan, no one can get hired until this dragon is slain. The call for racial and class warfare has been pushed to the side for now in favor of generational war. Three wars tearing society apart is the new three-legged stool for the elite to sit on and eat the whole pie.

  9. Michael M. Thomas

    Yves: I think you need to reiterate the conceptual etymology of “entitlements.” As I understand it, FDR used the word to describe his new Social Security program not with the implication, as is the case today, of something for nothing, but of something for something. He more or less (may actually have) said, they will have paid for it, therefore they will be entitled to it.

    1. Linden

      Exactly right. It also carries the legal meaning of being a benefit that the government can’t take away from a qualified recipient without due process of law. That’s why politicians hate entitlements so much. The only thing they hate worse than poor people is poor people with legal rights.

      1. JTFaraday

        But he’s not arguing that the term “entitlement” used with reference to SS is “poor peoples’ rights.” He’s arguing that they earned it.

        Let’s face it. Social security, with its emphasis on earned retirement benefits through employment was designed in such as way as to undermine the concept of any sort of “economic” rights for all.

        I don’t think this is the right tactic for young people. Young people need to evolve a different social ethos and a social safety net that actually works for the rather different economy they’re going to be struggling with.

    2. JTFaraday

      “hey will have paid for it, therefore they will be entitled to it.”

      I don’t know. You don’t think that implicitly scapegoating and infighting old saw, (which, it is true, Social Security has probably done more than any other domestic policy to promulgate):

      “But I eaaarrrned it, (and X didn’t)!” usually issuing from (and therefore bringing to mind) something that looks an awful lot like this:


      hasn’t become a significant cultural and generational irritant?

      Because I do.

      1. bh2

        For what it’s worth, many of us “back in the day” argued that Social Security would eventually (necessarily) become a welfare entitlement program, means tested.

        Deniers — the Left Establishment — said “Oh, nooooooooo…you will have paid into it and will only be receiving what is rightfully yours.”

        This was the same crowd of deniers who always explained away any concerns voiced about a growing national debt as not a problem because — wait for it! — “we just owe it to ourselves.”

        Excuse me while I go throw up.

    3. bh2

      Historical revisionism is the natural process of convenient lying by politicians to retrospectively justify mission creep. Here’s what really happened:


      Takeaway: “Social Security has evolved into something [FDR] never intended and actively opposed. [… He said] ‘We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. … No damn politician can ever scrap my Social Security program.'”

      FDR, of course, was a damn fool.

  10. Gil Gamesh

    Join the Dead Billionaires Party today (“The Only Good Billionaire….”). We will start figuratively, by taxing them out-of-existence (abolish capital gains preference, tax all passive/investment income over 1m a year at 90%, and over 10m at 99%, and Estate Tax of 100% on all estates over 5m…you get the drift). Most will up and leave…good riddance. Their departure will move American politics considerably leftward. Once they are gone, then jobs will return. Of course, if taxing the uber-rich into the ground doesn’t work, then more incisive measures will be required.

    1. Jerome Armstrong

      What you’re talking about is actually taking place already on the west coast. Not quite to the numbers you point to, but the end result. and yes, it has ended the rightwing zaniness.

    2. NotTimothyGeithner

      The issue isn’t the lack of jobs despite high unemployment. We need to understand work is only important to live. Someone still needs to make the french fries, but why can’t the burger flipper live with dignity and be recognized as part of the community?

      Why can’t we just pay people to go to school? Its much better than paying people to steal from government contracts or blow up foreign kids.

  11. Jim

    America has one of the world’s most lopsided wealth distributions. The top 10% own 75% of total wealth (property, stocks, bonds, other assets), whereas the bottom 50% own 1.5%.
    A 1% annual Wealth Tax on the top 10% of wealth holders, plus an additional 1% tax on the top 5% would amount to 3.1% of GNP. That tax would provide sufficient revenue to wipe out America’s current and projected future government deficits.
    The effects of the tax-mix on long-term growth have been widely studied. The literature suggests that corporate income taxes have the most negative effect, followed by labor income taxes, then consumption/excise taxes, and finally wealth/property taxes.

    1. avg John

      I would double your 1% tax on assets, and exempt accounts receivable, qualifying loans receivable (direct to U.S. main street business secured by new pp&e only), and the private equity company’s own property, plant and equipment. Also, I would do away with IRS corporate and partnership tax reporting, with all companies paying tax, based on their GAAP income.

  12. George Burns

    What I find particularly frustrating and sad is that mainstream Democrats led by our Hope for a Change President, make almost no mention of the more than 30 years of class warfare directed against the American people and its government planned and executed by people like Druckenmiller.
    If We, the People are daily brainwashed about the causes of our felt servitude, how can we defend ourselves and begin to take back what has taken from us?

  13. RUKidding

    Thanks for the info. I’ve started seeing blog commenters whining about how horrid & stupid it is to fight against “entitlement” cuts. Said “entitlements” are framed as only benefiting “rich boomers,” who “don’t need them.” Then the commenter will often go on to complain that said “rich latte liberal boomers” don’t care squat about how this recent Kabuki theatre over the debt ceiling/govt shut down did not result in Obama/the Dems demanding an end to the Sequester Cuts, the slashing of Food Stamps & so on.

    That the Sequester Cuts & the so called US Debt have nothing to do with Soc Sec & Medicare is never stated. Nor is it ever stated that the younger gens will most likely – should Soc Sec & Medicare NOT be cut – get to enjoy these retirement insurance programs, themselves. Rather the framing is that the younger gens will have to pay for the wealthy boomers but get nothing for themselves. Of course, there are solutions to ensuring that Soc Sec & medicare remain in place and provide enough going forward, such as raising the cap on Soc Soc income tax, etc., but these are never mentioned, either.

    It’s all either/or, black/white, you got yours & so I don’t mine, etc.

    Sad to see what apparently are the younger generation so easily being pitted against “wealthy granny” and deciding to throw granny under the bus. I know quite a few grannies on Soc Sec who are just barely getting by.

    And so on…

  14. avg John

    Let’s shove Granny. She’s easy. She can hardly keep her balance anymore and can’t afford slick Wall Street lawyers to take advantage of the loop holes in the law nor buy off the regulators. Bye-bye American pie Granny, it was nice knowin ya.

  15. steve from virginia

    Lessee …

    There are 240 million private autos in the US, each costs $9 thousand per year to buy and operate: in reality some cost more and some cost less but nine-ish grand is the median price. Multiply the numbers by the cost to get +$2 trillion every year that has to come from somewhere. Driving the car does not pay for the car nor does it pay for the fuel that is used in the car …

    Fuel is used once whereupon it circles the globe like a vengeful Older God looking for human victims to destroy after making them stupid first.

    The foregoing leaves out the delivery vehicles, buses, farm tractors and whatnot that can be used to (somewhat) pay for themselves.

    The $2 trillion is borrowed, so are the amounts needed for roads and real estate ‘development’, fuel supply and all that goes with it including our famous military …

    Something has to go b/c the loan amounts adding up every year indicate the managers are idiots who don’t know how to count. Depending where you look modernity’s debts are $55 trillion, $220 trillion or a neat quadrillion. Don’t forget the other countries’ debts. Who can possibly repay such amounts and by doing what? Every second the numbers relentlessly increase, every second more trust and confidence in the ‘system’ leaks away. An example of busted trust is the late, unlamented government shutdown/debt ceiling fracas.

    The rationale for the shutdown as well as US politics in general is simple: ‘What gets jettisoned so Americans can drive?’

    The bosses fix the blame on the elderly but the blame needs to fall on the elders’ cars … along with all the others’ cars.

    Americans are as dumb as the bosses, this is why the entire argument vs. Druckenmuller or whatever his name is is nonsense. Americans will starve before they give up their cars, they’ll give up their guns before they give up their cars. They’ll turn their guns on each other before they give up their cars. America = cars.

    Next is cars = America’s death sentence. If the car debts don’t destroy the economy, the onrushing fuel shortages will, our wars to gain more fuel will come home and our political system will be discredited by lies and denial.

  16. kevinearick

    You Are Here Tin Soldier

    The global economy is in a dead short.

    “I have plenty; have some.”
    “I got mine; you get yours.”
    “Get them before they get you.”
    You are here.

    Congress can only affect the middle class. Capital embezzlers are protected by the artificial nation/state border system that normally ensures their escape, “the most liquid plumbing, blah, blah, blah.” Congress has no idea what labor looks like because it has never worked a day in its life.

    Now, to avoid a real war, Congress is feeding the middle class to the wolves, layer by layer, every three months, under the umbrella of sequester and the debt ceiling dog and pony show, hiding the reality that the entitlements cannot be paid in plain sight, until the last moment. War begins when capital is pitted directly against capital, a tempest in a tea pot as far as labor is concerned.

    Consume it all, pretend to be busy and buy guns. That is all Congress has to offer the middle class. Get in line, follow the program, watch the magician and ignore the buzzing in your ear.

    Repeat after me:

    “Yes we can” print to infinity and beyond. “They pretend to pay us and we pretend to work.”

    Oh, that’s right; there is also the issue of the robots in charge of full employment and stable prices that have never worked. Next plan please, same as the old plan – do nothing, change your mind, get anxious and blow up – Rock of Ages.

    Dress up, click your heels and get on ‘ze’ train. Nothing new about IBM, the Bellwether.

    Funny, how the proton and neutron react automatically, seeking the perception of security. The only difference between any kind of bomb – clutch, propulsion or explosion – is perception of time. Keep chasing property and money to maintain the status quo.

    Borrowing to pay interest on the debt is like getting another credit card to pay interest on your other credit cards. That works, until it doesn’t. Go ahead, Nest.

  17. slothrop

    I am a Yves devotee, but this is Krugmanesque high-minded moralizing. “Social contract?” Is that some kind of joke?

    Overeducated, overindebted and underemployed twentysomethings are waking up to the fact that they are now to bear the cost of taking care of the overconsumptive, overentitled baby boomers whose excesses (and bad advice) more or less put them in their predicament of debt peonage. This is the way young people will see it and they will be right. They don’t need Druckenmiller to incite them.

    Tell me Yves, what exactly are you proposing to redistribute wealth back down to the 99%? MMT? The Magic Money Tree? Give politicians more power? The young should short politicians, and stash whatever savings they can muster in something like silver and they will be far better off. The government set up the framework to allow the subprime bets in the first place, and the Fed poured gas on the fire. Druckenmiller took the risk of being wrong shorting subprime, just as you did Yves when you shorted oil in 2008. Blaming hedgies for 2008 is a form of vulgar Marxist class warfare all its own.

    Rants like this one make me rather sure that there are very dark, polarizing times ahead.

    1. Thisson

      With the Keynesians controling policy from the top down, suppressing interest rates, is it any surprise that the Boomer generation hasn’t saved enough money to fund itself in retirement? Once that’s happened, isn’t it natural for them to look to a younger generation to support them? I’m sympathetic to their situation. But it sure does place a huge burden on the younger generation.

    2. Yves Smith Post author

      You really don’t get that you’ve been had, do you? No, you are gonna fall for the economic garbage you’ve been fed which spared the people who created the economy that took from the middle class to the rich AND EMBRACE MORE OF THE SAME. You actually want to be their victim!

      First, the generational trope is to distract you from the man behind the curtain. In case you missed it, older people are in debt too. Why? Oh, bringing up those kids had a lot to do with it. Go read Elizabeth Warren’s Two Income Trap. One of the big causes was that people who couldn’t afford to send their kids to private school competed for housing in increasingly scarce good school districts. And she wrote this is 2003, BEFORE the housing bubble.

      Or go read ECONNED. I explain the economic theories that led to the crisis. They weren’t promoted by boomers, they were developed by a math-fetishized economics profession starting at the end of WWII. In the 1970s, a well-funded conservative effort started a campaign that continues to this day to legitimate right wing, pro business propaganda. You’ve clearly bought into it and don’t even fathom that you’ve been spoon fed this stuff, along with the rest of the American public. Short form of story here:


      And you’ve just shown you don’t understand the economics of this at all.

      First, the US does not need to sell its debt to fund government. The US could simply deficit spend. Selling debt is a hangover from gold standard days.

      And China and Japan are not going to stop taking dollars. They’d have to stop exporting to us to do that. Both countries depend on exports and we are still the world’s biggest consumer market. They’ve been unsuccessful at making their economies do more consuming (rebalance) basically because they really don’t want to. They’ve been hectored over this (by us, among others!) to do so and haven’t.

      Let’s get rid of imports and exports for now, which would not change the picture in the case of the US. An economy has three sectors, households, business, and government. In a closed economy, the spending and saving activities of these three sectors have to add up to zero. That’s accounting. If you don’t believe that, you also don’t believe in double-entry bookkeeping.

      Households like to save (retirement, emergencies). Except for a couple of quarters in the early 2000s, the household sector has always been a net saver.

      Businesses are supposed to be net borrowers, to fund investments in the business. The reason most people and businesses worry about government running deficits is that if government runs a deficit while businesses are already spending all of the savings of consumers, they’ll compete for those savings, pushing up interest rates, which will produce inflation and/or a downturn.

      But thanks to changes in corporate incentives since the 1980s (more equity oriented pay) big companies, which do most of the investing (little companies don’t need much capital) have been underinvesting. When businesses don’t invest enough, you see either the government running deficits to make up the slack and/or consumers saving less. The other two sectors have to accommodate what the business sector is doing.

      In the early 2000s. the business sector became a net saver. That was simply unheard of in an expansion. Capitalists were flat out refusing to do their mob.

      So we need the deficits to continue. Otherwise the economy will contract. You can see this happening in every country in Europe which has tried cutting spending to lower debt levels, In every case, they’ve gotten worse because the economy shrank faster, resulting in the debt level being higher in the end relative to the size of the economy.

      The story you cling to is as empirically false as believing that the earth is flat. If you want to eat cat food or ramen to make the rich richer, be my guest, but keep me out of it.

      1. slothrop

        Warren is very illustrative. I remember listening to a Warren speech on “the two in come trap.” She was baffled that more income didn’t lead to a higher standard of living. Why was she baffled? Because she used the ridiculous inflation numbers coming out of the government. She argued that two the two income family spends 50% more (on housing, on health care, on food, on energy) after adjusting for inflation than the same family in the 1970s. Think about that statement. Spends more “after adjusting for inflation.” She’s not measuring the inflation! Bureaucratic jibberish.

        “So we need the deficits to continue. Otherwise the economy will contract. ”

        And that fantasy world will continue until, all of a sudden, it doesn’t. Your deficit argument is possible only because of something called the petrodollar, a political arrangement not an economic one, that is in its final chapter.

        This “my income is your spending, your income is my spending” fashion neglects the backbone of any society: savings. How can you even talk about “net savings” when it is being destroyed buy inflation? Oh, right, inflation is 1%.

        We see the world very differently.

        1. Ben Johannson

          No, deficits are not enabled by petrodollars. Japan and England don’t control petrodollars, and yet they deficit spend just as we do, so there’s an empirical problem with your assertion.

          Secondly, for one to save another must spend more than their income. You understand this, yes?

          Thirdly, inflation? Seriously? By your definition the U.S. has been experiencing ruinous inflation for the last hundred years. Are we really back to the Gilded Age/Golden Age tomfoolery?

          1. slothrop

            All central banks hold US dollars as reserves, so Japan and England are “petrodollars,” but you’re missing the point. Let’s keep it simple. Demand for a country’s currency is a function of the demand for its exports, right? So the petrodollar scheme set up in the 1970s created false demand for USD, enabling the US to spend far beyond what it could otherwise. This allowed Reagan to utter the idiotic statement “deficits don’t matter.” Until then it was basic economics (and logic) that there was a direct link between deficits and inflation. This floating currency system based on the petrodollar that has allowed the US to export nothing but dollars changed all that. It is an arrangement of power, not economics (whatever that means) and will collapse when the ME blows up. The consequences will be horrific.

            I have no idea what your second statement even means. In a land of perpetual money printing, all fashionable theories make sense. There is no reason gold should be trading anywhere near where it is if it was priced according to the rational of most of the economists who talk like this in their self-contained world of counterfactual fictions called models. For them gold is “insurance” whose price is a function of fear. So why is it after a massive correction still 50% higher than 2008? Whatever drives the price of gold, it definitely isn’t just “fear.”

            1. Yves Smith Post author

              Lordie. You really are out of your depth.

              FX reserves have nothing to do with bank reserves or the domestic money supply.

            2. Ben Johannson

              “Demand for a country’s currency is a function of the demand for its exports, right?”

              No. Demand for a country’s currency is a reflection of the power and diversity of its economy, meaning a country that offers a vast array of goods and services has a more useful currency in which to save than does Sri Lanka. How on earth could the demand for U.S. currency be determined by how much the U.S. exports?

              You’ve been repeatedly warned by a number of people that you’re out of your competence zone on these issues (they’ve been trying to do you a favor) and yet persist on doubling-down. You’ll never understand what’s going on so long as the depth of your intent to learn remains at the level of a Wikipedia entry.

      2. slothrop

        I am definitely sympathetic to your complaint Yves. I do think there has been a massive wealth transfer to the rentier class. The question is what to do about it. I believe the mechanism of that transfer has been institutionalized inflation. Take the other side of the trade. Forget politicians. Anyone can accumulate silver to participate in the wealth transfer when it floods out of paper money. The endgame here is some kind of new currency. If history is any guide it will be a commodity-backed currency. Maybe it’s different this time.

        1. Ben Johannson

          We didn’t abandon fixed-rate convertible currency because it was working well. That period was an economic disaster, with contractions in the 20-30% range a common occurrence. But if you’d like a 19th Century standard of living so much, give me all your “worthless” dollars and I’ll see you get it.

      3. Moneta

        I understand your arguments but if I pay for the boomers and the system does not change who will pay for me?

        It’s only the boomers who seem to think there is enough for future generations. I can only see s sharp drop in lifestyles for the young in developed countries over the next few decades.

        If the young are working to pay for the boomers that means the boomers are controlling the use and consumption of resources. Chances are that the way of life of the boomers based on their ideologies will keep on directing resources into wealth destroying energy intensive endeavours.

        This leads to my next question is, who should be deciding how resources get consumed, the workers or the retirees?

        1. Sammy Maudlin

          “If the young are working to pay for the boomers that means the boomers are controlling the use and consumption of resources”


          Money is not a “resource.” It is a medium by which resources are valued and exchanged. People are “resources.” Young people are not working to “pay” boomers. Young people ARE PAID money when they work to support boomers in their old age so they can consume other resources needed to support their own (and their families’) existence. Needlessly cutting social security simply ensures two bad outcomes:

          1) Old people will not receive the care they need; and
          2) People who are willing to work (and start businesses) to support those old people in exchange for money will not have the opportunity to do so.

          Sounds like a bad economic policy to me.

          1. Moneta

            I’m not talking about money at all.

            Think in terms of energy and resource consumption. If I am working to help boomers keep their houses, cars, health care (which is incredibly energy dependent) that means that a lot of calories are getting burned to pay for the boomers and to keep businesses running to keep them going.

            That means energy not going to me and my kids. That means energy getting burned to sustain past lifestyle decisions which don’t make any sense today. That means less energy to change our systems which are based on environmentally unsustainable ideals, and this for another 20-30 years.

            I believe we should support the elderly but not when they are healthy and made the wrong financial decisions all their lives. I don’t believe they should be retiring and living off my work at 65 if they are healthy. If people had wanted 1200 square foot homes, these would have gotten built.

            I believe that energy and resource consumption is out of control in North America and that by just printing and paying out pensions to the boomers we are clinging to an environmentally unsustainable lifestyle which will just burden the younger generation.

            In my mind, a situation where 25-30 year olds can’t find work and are stuck living in their parents’ leveraged 2500 square foot house is proof that the system is upside down. While people think it’s all about a lack of jobs, I see it as a generation that lived beyond its means and is doing whatever it takes to not have to lower its standards, making the younger generation its serfs.

            In my mind, the fact that houses doubled while the world’s population went from 3.5 billion to 7 demonstrates the American folly. A large percentage of the population lived beyond its means and this population is asking for pensions that will cover these energetically overextended lifestyles.

            The Average American has never thought resources could be limited and has been living as if there is no scarcity.

            Maybe I am wrong and there are plenty of resources to keep on living the way were are but the boomers will have to convince me.

      4. Roland

        I don’t like the idea of inflating away the debts owed to people in other countries.

        Chinese workers are getting cheated badly enough by their own ruling class, without their American customers deciding to devalue the money which Chinese had accepted in good faith in exchange for real goods.

        When you say that exporters around the world have “no choice but to keep accepting” a no-limits fiat currency, all you’re doing is boasting about your country’s power to cheat people who sold them real goods and services.

        People who worked in goods-exporting industries in China didn’t have a lot of choice but to participate in the sort of goods-exporting economy their ruling class dictated to them.

        As for GDP shrinkage, why not let the GDP shrink? Nominal GDP is not synonomous with the public welfare, as has already been mentioned by others on this thread. Americans don’t need a bigger total production of goods and services. They produce more than enough already. What Americans need is a redistribution of wealth and an end to misallocation of capital.

        1. Calgacus

          Roland: I don’t like the idea of inflating away the debts owed to people in other countries.

          Nor do I. Inflation is a bad thing. MMT, Keynes, institutional economics, functional finance, and I daresay Yves is not about inflating away debts. Not about cheating workers in other countries, in any country. It is not about devaluing money. What it is about is careful logical reasoning. What it is about is stable prices and full employment. They go hand in hand.

          Slothrop and Moneta above surely mean well, but they simply aren’t careful. They aren’t paying attention to the accounting, and what the accounting uhhh – accounts. They are still prey to mainstream nonsense arguments – that sound so convincing. That sound so sensible. But if you examine them in an “I’m stupid. I am going to take baby steps to follow this argument and make sure I understand each word in it” mood – do they hold up? (uhhh NO) They haven’t pondered the crucial question “What is Money?” – by reading MMT & Mitchell Innes.

          If the USA prints the frigging money for a frigging Job Guarantee – Just plain decides to have full employment and a robust economy, and/or to have a sane public health care system like every other country on earth – or to have public housing and other policies that made homelessness nonexistent in the USA and everywhere else in the developed world a few decades ago – how on Earth does this cheat Chinese workers? – how on Earth does this cause dishonest, cheating devaluation/inflation?

          1. Moneta

            What we need is a less energy intensive economy. However North America is addicted to resource and energy intensive materialism.

            If the average American got a debt jubilee, would he/she buy more services or more stuff? I am willing to bet the worship of stuff would prevail because from my vantage point, there has been no change in paradigm.

            I think the US will print because they can. But I don’t think printing will save the middle class unless they go through a paradigm shift first.

            Printing is an amazing tool for the elite because it dilutes the purchasing power of money without having to blame anyone in particular.

            Printing will just accelerate investment into energy intensive projects which probably should not be done.

            Printing gives more power to investment banks.

            Printing leads to planned economies.

            1. Calgacus

              I think the US will print because they can. But I don’t think printing will save the middle class unless they go through a paradigm shift first. The only paradigm shift necessary is to understand how money works. How it has always worked.

              Unfortunately, a paradigm shift has already occurred. It went from understanding money- quite well in the 30s & 40s – to the victory of nonsense-pedlars in the 70s. Thinking that there is something necessarily, magically wrong with printing money, or that there is any other way to create money (= a negotiable credit/debt relationship) is integral to this victory of ignorance.

              Printing is an amazing tool for the elite because it dilutes the purchasing power of money without having to blame anyone in particular.

              Again, there is no alternative to “printing”. Where on earth did anybody ever get any money, any credit, any bond from? Somebody else printed it. Printing money does not necessarily dilute the purchasing power of money. Printing money does not necessarily dilute the purchasing power of money. Printing money does not necessarily dilute the purchasing power of money.

              Why on earth should one think it does? Why should an economy with “more” – in some sense – creditary relationships – have these relationships devalue relative to the goods and services that cannot be produced without them? How could the idea of forcing people to not work (= unemployment) – because we crazily think we have run out of relationships for them to enter into – be a good idea?

              Printing will just accelerate investment into energy intensive projects which probably should not be done. Sure, it could. But if we decide not to go this way – we won’t.

              Printing gives more power to investment banks.
              In general, no. Only if the new money is simply given to the banks. Untargetted printing (like the dumb idea of a big BIG), let alone New Deal, JG targetted printing usually has weakened the banks’ power.

              Printing leads to planned economies.

              And this is bad, why? A creditary economy, a monetary economy, a market economy, a capitalist economy is by definition a planned economy. Rational planning is a good thing.

              1. Moneta

                Of course, money printing can work wonders if it is based on an efficient allocation of resources.

                But one has to look at the current conjuncture when assessing how it will evolve. Observing the variables in front of me, nothing leads me to believe that the stars are aligning for efficient and fair money printing.

                Those currently in power have been making bad decisions for 3-4 decades now and they don’t seem to be leaving anytime soon. Please explain what forces will suddenly illuminate them into changing their investment ideologies?

                If you declare a debt jubilee without an increase in industry, you’ll just get major inflation.

              2. Moneta

                Over the last 2-3 decades, the US should have been investing in sectors that would care for an ageing population. With 300 million people and a net importer of oil, it should have also been planning for more energy efficiency. Instead, it doubled the size of the houses, expanded the road system, supersized its landfills, etc.

                Goodwill and wealth was squandered. Because the proper investments were not made, it can not reap the benefits no matter how much its population calls it unfair. And even if you started printing and investing properly, the benefits would still take at least a decade to pay off, not helping the current group of retirees.

            2. A Real Black Person


              The problem with the others here is that many people are viewing everything through ideological lenses. They don’t want to acknowledge that everyone–not just the high status people are complicit in our current predicament. The others on here, many of whom are on the Left think redistribution
              will cure our economy–really, our civilization’s– problems aren’t really thinking things through. Asking the CEO of a fast food corporation to take a ten million dollar pay-cut and divide 10 million by around 5-10 million workers leads to a very small pay increase for EACH worker. There’s too much emphasis over how much more money the wealthy are making but not so much on why the wages of workers are falling so much. Could it be because the supply of workers is increasing faster than demand?

              Personally, I think every single person, who desires to live above a subsistence level, including me, is greedy. First World lifestyles are increasingly unsustainable in a world with seven billion people competing for declining (fossil fuel) resources (and status which leads to wasteful consumption). What is sustainable is a very primitive lifestyle, which most of us don’t want to live. (can’t get laid this way–which is why many advocate for a simple lifestyle these days are over the age are older individuals who are not concerned with attracting mates or competing in the Rat Race.)The majority of us are “ambitious”. We want too much stuff and someone to make it for us. This mentality is the mentality that leads to social coercion, slavery and inequality.

              Social coercion, slavery, and inequality are problems of civilization–not just problems of capitalism. Even Communism couldn’t extinguish inequality. The central planners who governed Communist societies were naturally an ambitious bunch, and eventually succumbed to their deeply
              rooted, genetically programmed need to enhance their social status–at the expense of others. Will these problems be solved? Yeah, but not without bloodshed. I’m afraid that only cruel mother Nature will solve our problems. We are only capable of perpetuating them, despite all our hand wringing.

    3. Jerome Armstrong

      “Tell me Yves, what exactly are you proposing to redistribute wealth back down to the 99%”

      Wealth tax. 10 percent. One-time. Just to make it obvious, combine it with a choice of opting-out for all those with under 500K in savings.

    4. different clue

      Dear Mr. Slothrop,

      Are you too young to remember the Reagan Rescue of 1983?
      Our rulers way back then said we boomers were going to break SS when we retired unless “something” was done. So what the rulers did was to raise our FICA taxes to way above what was needed to pay benefits to a previous generation of FICA payers. That way-raised difference was supposed to be held in a “trust fund” for us boomers who would spend OUR OWN prepaid FICA trust fund money back to zero as we retired and died. The SSA lends that money to the General Budget government and gets special bonds for it.
      The real secret (Greenspan) intent was of course to NEver Ever pay those bonds back. The real secret (Greenspan) intent was to use that money to pay for tax cuts, wars, and other upper-class enrichment revenue streams. The secret plan was to tell you that you would support us. They hoped you would never learn that we have spent/ will spend DECades PREpaying OUR OWN Social Security with those raised-to-fill-the-trust-fund FICA taxes.
      I will be charitable and assume you were just too young to know this. Well . . . now you know.

      1. katiebird

        I remember. The deal doubled the FICA tax and It was a painful thing to experience (for me at that time) …. And it was less than a year later that we started hearing again about how Social Security was bankrupt and we’d never see a dime.

        It’s been relentless.

        And to the person telling me about my out of control spending and selfishness. I’ve never had children but at one point, my salary was making a substantial contribution to 10 other people. And the only debt I have is my mortgage.

        You can blast away at Baby Boomers all you want but television and commercials don’t reflect the reality that many of us have lived.

  18. thisson

    Yves – First, I take issue with one of the premises of the article, that it is the shorts who are among the most culpable actors in precipitating the crisis. Instead, I think the critical process at issue is the one by which BBB-rated securities are turned into A-rated securities through overcollateralization, credit-support, etc. THIS is what drove demand for crappy loans. Because without this mechanism, the institutional investors constrained to purchasing “investment grade” securities couldn’t participate in these transactions. The discussion of Wang glosses over this mechanism.

    Second, I take issue with this statement, which is not explained to my satisfaction: “The use of CDOs masked the nature of their wagers and brought unwitting BBB protection sellers to the table.” I took this to be a reference to the protection issuers such as AMBAC. What drew these protection-writers into the market were the fraudulent Reps and Warrantees that were made by the issuers. It wasn’t the instrument of the CDO that was to blame for the crisis. This was an elaborate control fraud where the originators knew they were generating liars loans, the securitizers knew they were flipping garbage, and the shorts in deals like Magnetar were cherrypicking the issues included in the securitization pools.

    It is my belief that the income inequality has little to do with issues such as Auction Rate Securities and Warren Buffet’s 6% rate. What it has to do with is the fact that deficit spending dilutes the buying power of wages. This is the reason why real wages have not increased in 30 years (the substantial bulk of the deficits began in the early 80s and picked up steam from there). Both parties are to blame for these deficits, and it doesn’t make sense to place the blame solely on those who reduced reveneus rather than also scolding those who increased spending, as the deficit results from both.

    1. Yves Smith Post author

      No, you’ve revealed you don’t understand the structure of RMBS.

      I have have a full 60 pages, with footnotes and other supporting analysis, in Chapter 9 of ECONNED on how CDOs drove the demand for bad subprime loans. Overcollateralization and excess spread had nothing to do with that. It was the equity tranche, NOT the BBB tranche, that benefitted from the overcollateralization and excess spread. Banks initially kept that, and later sold that in the form of “net interest margin” bonds.

      Subprime was around since the early 1990s and’ didn’t lead to overly risky lending when CDOs were not part of the picture. There were actually two times that CDOs developed to take the subprime risk: a small one in the late 1990s and the big one we know about. Each time the CDOs became a Ponzi, and each time the Ponzi collapsed, so too did the subprime market that had come to depend on it. The reason the CDO market came back as quickly as it did was that the structure was changed and the new CDOs were supposedly better than the older ones.

      There was simply never that much investor demand for BBB tranches ex CDOs. This Congressional testimony (summarized here, with the full text embedded) goes through the data.


      And you’ve straw manned my argument. I never said ARS had to do with income inequality. I said ARS were proof of how the damage done by Druckenmiller and his fellow shorts went well beyond the housing market. In case you missed it, the big cause of the recent increase in deficits worldwide was the global financial crisis. The sharp contraction led to a collapse in tax revenues, while spending increased, due both the the high costs of bank bailouts and some increase in social safety net spending. But the first item, the collapse in tax revenues, was the really big driver.

      As for “distributional effects of deficits”, that’s a non-seequitur. How about “cutting taxes and making them less progressive benefits the rich?” And how about “corporate compensation policies that lead CEOs to care only about shareholders (shareholder democracy is a big made up economic theory to justify CEO enrichment, BTW, it has no legal foundation), encourages them to reengineer their corporations so as to screw workers and pay the C suite more?” The incentives are really obvious and they are working as you’d expect.

      1. thisson

        First, I now understand a portion of your statement and I can agree that there was limited interest in BBB products outside of the CDO market.

        However, your argument seems to be that “overcollateralization and excess spread had nothing to do with how CDOs drove the demand for bad subprime loans.” You blame the CDO for the problem, but I believe that the CDO is only to blame *because* these instruments, as sold, contained two different kinds of fraud: (1) “credit support” (which I will define to include overcollateralization, excess spread, and the inclusion of lower tranches to absorb first losses); (2) fraudulent reps and warrantees. I assert that “credit support” is a fraud because internal documents from ratings agencies showed that effectively, ANY instrument could have AAA-ratings or AAA tranches if it contained enough credit support (in other words, if you have enough crap, it becomes gold). CDOs could not have been sold without both of these kinds of frauds.

        As you know, CDOs buy bad subprime loans, yet end up having AAA rated tranches. They used overcollateralization and excess spread, along with lower rated equity tranches, to transmogrify low rated securities into AAA-rated tranches. They then took the portions of the securitization that they couldn’t get into AAA-rated tranches and couldn’t sell, and used those as ingredients in the next CDO (the “CDO squared”). This process of using “credit support” to turn high risk loans into highly rated tranches relied upon fraudulent reps and warrantees that were made to the purchasers of the CDOs, including pension funds and monolines. Hence the resulting litigation, that concerns both RMBS *and* CDOs.

        I haven’t “straw manned” any of your arguments (ARS, Buffet). I said they were irrelevant and I don’t think they add anything to the conversation. What I do think is important is your assertion that Druckenmiller and the shorts caused the collapse. I don’t think you’ve supported that argument well at all. Are you implying that CDOs wouldn’t exist without having shorts interested in creating deals like Magnetar? If so, what draws you to this conclusion? I think there was enough interest in these deals from the LONG side to have the deals created, but only because these were fraudulent deals and their true character was hidden (many of these institutional longs wouldn’t or couldn’t be buying these instruments had their true nature been revealed)

        You seem to be against cutting taxes and making them less progressive to benefit the rich. Yet your answer to this seems to be deficit spending. This is incongruent to me because deficit spending causes the real purchasing power of the dollar to be diluted. It thus acts as a tax, and in my view, is exactly the form of tax that hits the lower classes hardest. In my view, it is this tax that is crippling America’s middle class and poor, because it has deprived them of increases to the real wage. It is this tax that the rich have been able to avoid, and that has thus increased income inequality. The mechanisms by which the rich evade this tax (CEO pay, etc.) seem to be to be secondary to the impact of the tax itself.

        It seems to me that if you want to remedy this situation, we should curtail spending that benefits the rich most, and that we should end monetary policy (e.q. QE) that drives up the prices of assets held primarily by the rich.


    2. Banger

      Wages began to stagnate in the late seventies when productivity growth continued to go up while wages did not for somewhat complicated reasons both both having to do with political and social changes and the growth of foreign competition. Deficits had relatively little to do with that.

      1. skippy

        I thought all that productivity was sucked up stairs to create a new League of Super Heroes, in order, to take out the League of Super Villains. But… after defeating the Northern HQ, the Southern HQ reversed strategy after stealing the super crystal, increasing its power by the magic of the state.

        skippy… Sadly… now the League of Super Heroes is reduced to Wonder Twin Powers as the rest of the League went Ronin, Wonder Twin Powers are barely a match for the collapse of the magnetic field, after the crystal went bye – bye.

        PS. Northern HQ has taken advantage of the lull to regenerate.

    1. Banger

      Good question and I hope Yves answers it here. But I can answer that question from the political POV. Big money and the Democratic Party found themselves on the crowded dance floor in the late seventies such that traditional RP positions crept into the DP and resulted in changes in the tax structure that directly benefitted investors as well as a move away from unions and labor.

      After a period of instability and major changes in society, there was a real thirst for morning in America which, in fact, meant morning for corporations.

    2. Hugh

      Here is a synopsis that I use whenever anyone asks me that question:

      I call events since 1975 the construction of kleptocracy. What we have seen during this time has been the deregulation of capital, the promotion of systemic frauds, imperial wars, and capital transfers from the lower and middle classes to the rich leading to massive wealth inequality.

      It began under Carter. In response to inflation brought on by the oil embargoes and the poor financing of the Vietnam War, Volcker, Carter’s choice of Fed chairman but re-appointed by Reagan, began to raise interest rates to burn inflation out of the economy. In 1981 in the first months of the Reagan Presidency, he raised the federal funds rate to 20%, meaning that the prime rate was higher, and the rate that everyone else was being charged was even higher than that. It was really with Volcker that the Fed’s obsession with treating wage increases as inherently inflationary and to be combatted via higher interest rates began. As a result, coming out of the recession wages were flat and remained flat for the next 30 years. Also under Carter, you had the deregulation of the airlines and trucking. It was called deregulation of the industries but it led to the weakening of labor working in them and labor power more generally.

      1978 Airline Deregulation Act deregulating the airlines
      1978 Civil Service Reform Act set up the Federal Labor Relations Authority to oversee collective bargaining with federal workers. It was this entity which Reagan used to decertify Patco in 1981
      1980 The Depository Institutions Deregulation and Monetary Control Act repealed usury limits on what banks could charge in interest
      Motor Carrier Act of 1980: deregulated trucking

      Fed policy on wages, deregulation, and direct efforts against unionism began under Carter, and all of them had the effect of weakening the position of workers and beginning the transfer of wealth away from them. This was, of course, continued by both Republican and Democratic Presidents since.

      Here is a self-updating graph I made some time ago at FRED, comparing real and nominal average weekly wages for production and nonsupervisory workers. This category is the only one which goes back this far. I calculated real wages by dividing nominal wages by the CPI-W which corresponds to this worker group. The figures were not seasonally adjusted so this was all kosher. The red line is nominal wages and the blue line is real wages.


      1. Banger

        Good synopsis–the Carter period was very interesting. Carter was deeply hated by the big-time players in Washington and people did what they could to undermine his administration. Much of this was personal–Carter did not hire insiders to smooth the way for his administration which you have to do–he did not so the permanent government turned on him and, in my view, sabotaged his administration in every way it could.

        This period brought the money men and the DP bigwigs together to make sure something like Carter could never happen again–that’s why everything changed in that period. I can say a lot more about that period but then I’ll go on another overly long comment.

      2. charles sereno

        Hugh, ideally I’d like to see a graph charting the ratio of median/mean WEALTH over time as an index of change in inequality. I presume such data is (sic) not available on a fine time scale. However, by the looks of your graph, that ratio could be computed using INCOME data. Is that correct?

        1. Hugh

          I did a post back in September which showed up here and at corrente based on the Census Annual Report on Income, Poverty, and Healthcare.


          The first chart in that is annual real household income by 10th, 20th, 40th, 50th, 60th, 80th, 90th, and 95th percentiles. The 50th percentile would be the median for all households. This graph does give a pretty good picture of income inequality.

          However, you can also go to the report:


          In Table A-2 on page 40 of the report and 48 of the pdf, means by quintile are given and I suppose you could calculate a mean of means and compare that to the median. You can use this data to create a chart of the type you are interested in.

          There is also a category of shares of income by quintile as well in the A-2 which you might find interesting.

        2. Hugh

          I should have added that wealth is cumulative, whereas income is a series of snapshots. The lower on the totem pole you are the more of your income goes out for basic necessities, leaving nothing left, or with debt, negative wealth. The higher up you are the more income can be saved and even purchases like houses and their furnishings become investments/assets and can appreciate in value. And even if they fall in value, their value will still remain positive. The cumulative effects of wealth can be seen in the fact that the top 20%, those with large amounts of disposal income, own 90%+ of our stock, bond, and equity markets.

          I agree that wealth is important to look at, more important than income, but (A) wealth is harder to measure than income and (B) the results would be politically and socially explosive to the elites and rich, and so not surprisingly, data on this is much harder to find.

          1. Thisson

            Great work on that chart. I’d also be interested in workforce participation levels during that time-frame. The inquiry being, what is the relationship between real wage levels and employment levels? One might expect keeping wages down to create jobs on a relative basis.

  19. allcoppedout

    Given Econned is fairly old now it seems remarkable that what we get in main media has been future JP Morgan swagmen like Stephanie Flanders and the liquidity crisis myth – trivial C grade undergrad stuff – instead of more challenging work like Yves’ that at least challenge the highly dubious numbers and assumptions.

    Mexico puts forward a paper bringing Fromm into play – the milk formula of my transfer from science in which I could trust the numbers and recipe books to much more dubious “human sciences”. Much as I agree, we have been had at a much more basic level – ‘stiffed’ was Susan Faludi’s term.

    I think the figures of the stiffing are more or less as Yves has them – and if she’ll forgive the flattery, her analysis in this burns as brightly as any I’ve seen. What we have not been able to do is make this good sense the driver of practical action (Gramsci). I suspect something traumatic in this we sweep under the carpet, something with very long and deep history.

    In front of a fairly standard undergrad class in a business school it’s hard to get over the ‘spreadsheet consequences model’ Yves puts forward. There is a problem, even at this level, with basic subject literacy and numeracy, let alone any notion of what money is at the end of a shift down a mine and its links to financial control fraud. I’ve tried a few cases based on NC posts/comments in this area. Success has been limited and the main reason is the material makes most students very uncomfortable. It represents a very different reality to the world-views most of them cling to and have soaked-up in education and social indoctrination.

    The point here is we forever have to re-group the language and facts – a massive effort that has left me jaded. This is even with groups who have expressed interest in social economics. ‘Down the pub’ there is almost no knowledge of the issues. How can we move the debate amongst people who don’t debate? We not only have to deconstruct GDP figures, but also utter crocks that the bankster-political class are able to put over about themselves as ‘smartest people in the room’ and the idea that the sky will fall if we move to a sensible money system.

    ‘Plan B’ in all this can’t be what Labour/Democrats/Socialist governments put forward, as this is just a re-jigging of the spreadsheets the right uses. I think it has to be a guaranteed earnings plan to shift us through to radical change after a massive crash. We should be insisting governments put such a contingency plan in the public domain now. The right seem to repeatedly insist this is our job – why should this be the case in a democracy? Only captured government would fail to put the alternatives in front of us.

    If Yves is right (I’m sure) then unelected money-manipulators are destroying basic services. We should be able to call the cops, not be asked to put forward a new economic plan.

    1. Your Aim Is True

      Nail on head. Thank you, and Yves.

      “The point here is we forever have to re-group the language and facts – a massive effort that has left me jaded. This is even with groups who have expressed interest in social economics. ‘Down the pub’ there is almost no knowledge of the issues. How can we move the debate amongst people who don’t debate?”

      Those talkers at the pub or along the aisles of thrift shops and discount stores, those people on the golf course and in the auto lots and parking lots, yawning at their desks or steering wheels or kitchen sinks, thinking of lunch, how do they relate their lives and stories to the lives and stories of others? Gossip, football, church, walk around, drive around, alcohol, boredom, children, grandchildren, bills, doctors, problems, lost dogs, music, noise.

  20. steelhead23

    I loved your final paragraph. The exchange of shared prosperity in the form of rising wages, for a model based on capital power and asset inflation is the underlying cause of the crisis. Asset price inflation gives rise to speculation. As home prices rose, an array of useless and risky actions were taken to make homes more affordable – virtually all based on expanding credit. How different might things have been if labor power had persisted. In the end, I don’t believe these problems could be resolved without a dramatic increase in wages – and a concomitant reduction in corporate profits and political power.

    But they have indeed wrested that power from us Yves – and won’t give it back. A start could be a reversal of the Citizens United case, but quite frankly the whole political power structure in the U.S. is corrupted by money and I don’t see that changing until some horrendous event shocks the nation. Also, it isn’t just our political system that has been corrupted. The MSM is mostly a mouthpiece for the asset inflation = economic growth mindset. Speculation beats production in our current economy. I expect to die before this changes. They’ve won.

  21. bob

    In the 1960’s you had real “radicals” touring universities at the request of the students.

    In the 2010’s you have anti-radicals touring the universities and telling the students how “radical” toryism is. No doubt the students are paying for it. With borrowed money.

    “Welcome to your new lackey life, students. Now, who wants to get me my dinner? First one back gets a job interview. No guarantees, but I might let you carry my finger bowl for an unpaid internship.”

  22. allcoppedout

    I can’t think of a single area where regulation is working, through intelligence services, cops, finance, third-world looting and care provision. I’ve spent so much time ‘working backwards’ with spreadsheets in research bids I’m inclined to believe ‘someone’ must be doing this in big finance.

  23. Everythings Jake

    Things will change when the Druckmillers, the Dimons, the Blankfeins, and the rest of their ilk are scared and not before. And that will require something on the order of the guillotine.

    1. Wahrheit

      In 2009 I was astonished that there was not a shortage of rope and empty Wall Street lamp posts. In the interim, Obama has stood between the crooks and the mob by obfuscating the roots of the crisis. He has done America a diservice, but it has nothing to do with his birth certificate, Benghazi, or the other imagined grounds for impeachment that have become the obsessions of the Right.

  24. skeptonomist

    Of course the “young people” are not in “terrible shape” if they’re wage earners; their payroll taxes are not going to (should not) increase to redeem the Trust Fund and pay for boomers’ retirement*. The money for this will come from income taxes and other general revenue, and it is the upper-income people who pay these taxes who are campaigning to renege on payout of the Trust Fund.

    *Boomers have already paid their share as their payroll taxes have built up the $2.7T Trust Fund.

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