Classical economics describes the current phase of the business cycle as the declining rate of profits in which there was so much investment in supplying a profitable market that the result is overproduction.
The declining rate of profit is a condition of diminishing return in which the capital is so consolidated there is nothing left to feed the profit, which describes the financial crisis we have now.
Neo-classically, the rate of decline is characterized with a de-leveraging of a mature, overconsolidation of industry and markets, and especially with an overaccumulation and surplusing of capital in the financial sector. Hedge funding, or leveraging financials, is so profitable it is the compelling demand of money for profit, and any financial manager that can be considered sophisticated is doing it. The overproduction--the inability to repay the leverge without printing more money (inflation)--is a deleverage phase that is a highly negative effect on the real economy that already suffers a suboptimal investment with the leverage finance.
The deflationary trend, and the declining rate of profit, is magnified. The result is general demand reduction, less available credit needed in a credit economy, unemployment and recession.
The inflationary dimension will be controlled by demand reduction and is classic overproduction that causes crisis like the Great Depression. There is less need now for the Fed to raise rates to deflate the economy (control demand and cause overproduction). The Fed is likely to lower rates to support real estate prices, which accounts for at least 70 percent of the leverage, and the deleverage.
Lowering interest rates along with socializing the worthless assets of leverage finance will resart the leveraging cycle. This will deepen the crisis before regulatory reform and legislative action can occur to control it in lieu of a free market mechanism. The economy will improve, but then get much worse because credit, what the credit economy of a consolidated capital is dependant on, will already be tight and will crowd out growth (real economy supply-side) investment even more. While it will not result in classic depression, it will cause a deep and prolonged recession and tremendous hardship for "classes" that are not the upper class.
Causing and verifying extreme class hierarchy (a crisis of disequilibrium), of course, is what classical and neo-classical economics is designed to do if capital and markets are allowed to consolidate: to create and confirm class distinction with deprivation, or classic overproduction that is now neo-classic deficiency of available credit for real economy growth and the demand (the optimal distribution of income) it produces to drive the world economy.
This macro economic dynamic is essential for the small 401K investor to realize and understand. Ideologically it is not favorable to realize the cycle of deprivation because the legitimacy of the consolidated marketplace is the value of limiting the risk. That limit, however is realized in class distinction that is confirmed in a detrimental deflationary trend and a spreading of risk that is our current legislated, financial bailout on worthless assets now owned, socialized, by The People. It is state capitalism with The People being assigned, leveraged into, all the risk and all the detriment in class distinction (the Hamiltonian model of political economy).
The stabilization act will just make the problem worse for 401k investors because it is not designed to support your financial interest. It is to support the leveraged, neo-classical, financial cycle that looks to consolidate your assets to pay the return on the leverage that is profit without growth--deflation, recession.
The phase of the business cycle we are now in is defined by declining profits which is indicated, confirmed, by the data. It just gets worse going forward, and the stabilization legislation will just provide a brief bounce.
The worsening trend is avoidable, the entire crisis is avoidable, but the market is rigged to make the same mistake, to algorythmically recur the cost and the benefit (an exclusive class benefit), over and over in a cycle.
Quick reversal of the deflationary trend and a real economic stabilization that is not for an exclusive benefit comes in the form of recapitalizing the benefit of leverage finance from the ground up. That will be a benefit for exeryone and will be a confirmation of "we The People" as meaning we are genuinely all in this together rather than a few take the benefit and the majority take the cost in support of class distinction.
If the financial elite are to enjoy the benefit up, they can take the loss down by redistributing the profit to The People that will reward their investment with the profit of economic growth and economic health.
Very best wishes.
Showing posts with label leverage finance. Show all posts
Showing posts with label leverage finance. Show all posts
Thursday, October 2, 2008
Tuesday, September 30, 2008
Mathemarics of Leverage Finance
The Mathematics of Misery
If you are manager of a private equity fund loaded with billions of dollars consolidated from the dot-com bubble you inflated and busted with the inequitable bid of your consolidated capital, and you hedge, or leverage, your assets for a 30 percent return, where did the profit, the capital gain, come from.
It would not come from economic growth at 2 percent. You are not investing in economic growth, but pure profit--inflation. Merely deciding to buy futures paper on commoities, for example, leverages, or magnifies, with an inequitable bid, the price of those contracts without risk, and without growth. That magnifies the leverage to a 30 percent gain that, with a favorable tax rate (a subsidy), encourages the practice and magnifies the speculative demand, and the commodity price, even more. The result is stagflation: rising prices and slow-to-no growth.
If a dollar borrowed is returned at a 30 percent added value, somebody eventually ends up having to pay it. The banks don't want to pay it. They want to keep the gain and not pay taxes on it. The game is to keep the gain without the pain, so the "plan" is to nationalize the debt into an economic rescue plan that will be managed and paid through the treasury department.
With money being leveraged, borrowed, for a 30 percent or more return until the capital is so consolidated that there is none left to finance the return--for banks to loan money to each other without the pain of paying the return without growth, the credit market locks up. The result is liquidity crisis.
Our current economic crisis is the risk devolved, trickled down, to The People with only a small gain. Most of the gain, the profit, is retained by the consolidated capital. It is over-surplused and must be borrowed to continue operation of the "real" economy, and because a large part of the economy's available credit was borrowed to entrepreneur, to investment bank--exchanging borrowed funds to profit without growth, the capital available for growth was both crowded out and consolidated so that now the capital, industry and markets are so consolidated that growth is virtually impossible without rewarding the inefficiency of allowing capital and markets to consolidate.
The hedge-fund magnifier effect is falsely argued as the multiplier effect in which consolidated economic entities and its capital multiplies (trickles down) industries and markets in support of it. Consolidation of capital and markets operates to limit economic growth in order to magnify, or multiply, the return on a limited supply provided by a limited number of suppliers with deficient investment. The result is inflation with a deflationary trend, which is what we have now.
For the vast majority of Americans, rendered dependant on the use of the consolidated capital, this is a mathematics of misery.
Leverage finance always results in deflation and rising prices. So why do we continue to allow for it? Why do we continue to reward it, like with a Wall Street bail-out plan sold as a plan to rescue us?
Are we really that stupid? No, just that oppressed by a model for tyranny of the marketplace falsely sold as the self-determination of a free market.
It's time for real freedom, a true legitimacy of self-determination that can only be truly had through ensuring the processes of pluralism in priority.
Deconsolidate the capital and reverse the regressive tax incentive that perversely supports it.
Very best wishes.
If you are manager of a private equity fund loaded with billions of dollars consolidated from the dot-com bubble you inflated and busted with the inequitable bid of your consolidated capital, and you hedge, or leverage, your assets for a 30 percent return, where did the profit, the capital gain, come from.
It would not come from economic growth at 2 percent. You are not investing in economic growth, but pure profit--inflation. Merely deciding to buy futures paper on commoities, for example, leverages, or magnifies, with an inequitable bid, the price of those contracts without risk, and without growth. That magnifies the leverage to a 30 percent gain that, with a favorable tax rate (a subsidy), encourages the practice and magnifies the speculative demand, and the commodity price, even more. The result is stagflation: rising prices and slow-to-no growth.
If a dollar borrowed is returned at a 30 percent added value, somebody eventually ends up having to pay it. The banks don't want to pay it. They want to keep the gain and not pay taxes on it. The game is to keep the gain without the pain, so the "plan" is to nationalize the debt into an economic rescue plan that will be managed and paid through the treasury department.
With money being leveraged, borrowed, for a 30 percent or more return until the capital is so consolidated that there is none left to finance the return--for banks to loan money to each other without the pain of paying the return without growth, the credit market locks up. The result is liquidity crisis.
Our current economic crisis is the risk devolved, trickled down, to The People with only a small gain. Most of the gain, the profit, is retained by the consolidated capital. It is over-surplused and must be borrowed to continue operation of the "real" economy, and because a large part of the economy's available credit was borrowed to entrepreneur, to investment bank--exchanging borrowed funds to profit without growth, the capital available for growth was both crowded out and consolidated so that now the capital, industry and markets are so consolidated that growth is virtually impossible without rewarding the inefficiency of allowing capital and markets to consolidate.
The hedge-fund magnifier effect is falsely argued as the multiplier effect in which consolidated economic entities and its capital multiplies (trickles down) industries and markets in support of it. Consolidation of capital and markets operates to limit economic growth in order to magnify, or multiply, the return on a limited supply provided by a limited number of suppliers with deficient investment. The result is inflation with a deflationary trend, which is what we have now.
For the vast majority of Americans, rendered dependant on the use of the consolidated capital, this is a mathematics of misery.
Leverage finance always results in deflation and rising prices. So why do we continue to allow for it? Why do we continue to reward it, like with a Wall Street bail-out plan sold as a plan to rescue us?
Are we really that stupid? No, just that oppressed by a model for tyranny of the marketplace falsely sold as the self-determination of a free market.
It's time for real freedom, a true legitimacy of self-determination that can only be truly had through ensuring the processes of pluralism in priority.
Deconsolidate the capital and reverse the regressive tax incentive that perversely supports it.
Very best wishes.
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