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April
04
2018

The Problem With A State-Cartel Economy: Prices Rise, Wages Don't
Charles Hugh Smith

The vise will tighten until something breaks. It could be the currency, it could be the political status quo, it could be the credit/debt system–or all three.

The problem with an economy dominated by state-enforced cartels and quasi-monopolies is that prices rise (since cartels can push higher costs onto the consumer) but wages don’t (since cartels can either dominate local labor markets or engage in global wage arbitrage: offshore jobs, move to lower-wage states, etc.)

Think about the major expenses of the typical household: Internet, telephony, cable and other digital services: cartels. Airlines: cartel. Healthcare insurance, providers and Big Pharma: cartels. Defense weaponry: cartel. Higher education and student loans: cartels. Mortgages: cartel. And so on.

The economy is now dominated by two consequences of state-enforced cartels:

1. High profits / high incomes for the owners and managers at the top who reap most of the gains of the cartel: high-income individuals pay most of the income taxes and fund most of the political class’s campaign contributions. No wonder the political class insures that the state protects cartels from competition: it’s called self-interest.

2. Debt. i.e. credit for consumers, so they can continue to borrow more to pay the ever-higher costs of living.

But debt has a cost, too, and even at low rates of interest, eventually the interest on ever-larger mountains of debt crimps households’ spending and their ability to borrow more.

When consumers aren’t earning more and can no longer borrow more to support additional consumption, consumption and the rate of new debt expansion both decline, guaranteeing recession.

Cartels don’t really have competition, and so there is no pressure to lower costs; cartels have no incentives to innovate in ways that radically reduce costs and improve their services. Consumers see this most dramatically in healthcare and higher education, where costs just keep rising year after year.

If consumers can’t borrow more to pay higher costs, then cartels lobby for the government to pay their rising costs via deficit spending, i.e. the government borrows more to fund the cartels.

Now that students are over-indebted, the higher education/lending cartels are demanding that the government pay the students’ debts, so neither cartel suffers any decline in income/profits.

Since competition would threaten profits and higher prices, cartels buy political influence to protect their rackets. Politicos, always desperate to raise millions for their permanent campaigns for re-election, are happy to comply.

The only output of this system is higher public and private debt taken on to pay the rising prices imposed by cartels, and stagnation as wages no longer enable the bottom 80% of consumers to keep up with ever-higher prices.

The vise will tighten until something breaks. It could be the currency, it could be the political status quo, it could be the credit/debt system–or all three.

Here’s a chart of the net result of a financialized state-cartel economy: the politicos skimming fortunes in campaign contributions love it, and the protected cartel insiders skimming the nation’s wealth love it, too. Well let’s see, that’s all the important people, so what’s not to like?

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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At readers' request, I've prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the "Peanuts" comic character Lucy, who once issued this terse biographical summary: "A man was born, he lived, he died." All undoubtedly true, but somewhat lacking in narrative.

I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.

The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.

We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.

I was quite active in the American Friends Service Committee (Quakers) and the People's Party of Hawaii in this era (1970s).

I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.

Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.

Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.

Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press--a now monotonous result of writing fiction. (Seven novels and I still can't stop myself.)

I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.

The site's primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.

The blog is #7 in CNBC's top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.

 

www.oftwominds.com