If you have not yet read Part 1: Could Modern Monetary Theory (MMT) Actually Save Us?, available free to all readers, please click here to read it first.

MMT is a financial Roach Trap — it’s impossible to back out of MMT once it’s launched. The demands for more spending will skyrocket, and there will be no politically viable way to say “no” to additional spending.

The initial surge of spending will likely be highly successful: as trillions of dollars gush into the economy, spending and tax revenues will leap and the illusion of sustainability will be anchored in the public’s mind and in the media: look, MMT is working just like we said it would! Inflation is still tame.

Yes, inflation will be tame for a brief honeymoon, as inventories can be drained without raising prices. But once the higher demand races through the supply chain, prices will rise in correlation to scarcity, competing demands, etc.

One can easily imagine the land rush of special interests and constituencies to demand a new piece of the “free money” pie in this honeymoon phase: “free” medications (at full Big Pharma prices, of course); “free” university (at full tuition, of course); “free” childcare; “free” Social Security increases, and so on in a tsunami of demands.

Once inflation starts rising, the current rigged methodology of the Consumer Price Index (CPI) will mask it for a time, just as it does now. But eventually, reality will break through the artifice and… (Enroll now to continue reading)

If you have not yet read The FAANG-nary In The Coal Mine, available free to all readers, please click here to read it first. Note that this Part 2 is an updated version of a report first published in 2014.

In Part 1, we noted the eroding good options for investment capital in today's "Everything bubble" financial markets, as well as the dangerous risks that another 2008-style crisis is brewing. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.

In Part 2 of this report, we explain why the policies of the governments and central banks around the world that have boosted assets such as stocks, bonds and real estate to new bubble highs will cause a crisis that will be as damaging as 2008 — yet unfold quite differently, in ways the system is not prepared for.

Fighting the Wrong Battles

The outlines of the coming crisis were readily visible in 2007; the subprime domino was toppling the market for mortgage backed securities which in turn was toppling the market for credit defaults, collateralized debt obligations (CDOs) and a host of other exotic financial instruments.

Those of you who were actively following stock markets in 2007 and 2008 may recall the wild surges of euphoria that accompanied every Fed policy announcement. Stock indices shot up every time, only to falter once again as the liquidity injections failed to resolve the underlying collateral/valuation crisis.

When liquidity programs failed to fix the erosion of collateral, markets went into a free-fall.

We can anticipate that the Fed (and other central banks) will respond to a renewed collateral/valuation crisis in the same way they resolved the crisis in 2009—by buying assets directly in vast quantities.  The Fed’s option of buying stocks directly (for example, index contracts or funds) is sometimes referred to as the Nuclear Option, the ultimate backstop to a global meltdown.

But the nuclear option won't fix anything, because…

If you have not yet read Part 1: The Pie Is Shrinking So Much The 99% Are Beginning To Starve, available free to all readers, please click here to read it first.

In Part 1, we reviewed the shift from the expanding economic pie of the second half of the 20^th century that enabled a parallel expansion in universal rights and entitlements. 

But here in the 21^st century, the pie is shrinking and the social movements that reduced asymmetries of wealth and power in the 20^th century are no longer effective. 

In Part 2, we’ll go deeper into the structural changes of the economy, and explore why social movements have slipped into ineffectual symbolic gestures that fuel fragmentation and frustration — and why that will lead to a dangerous boiling over of the 99% against the elites controlling the system.

The “Winner Take Most” Economy

An economy characterized by soaring wealth and income inequality is clearly a “winner take most” economy: Richest 1% Made 82% Of Global Wealth In 2017

Peak Prosperity has covered the structural changes that have created the WTM economy at length for many years, so we can quickly summarize the key dynamics:

Cartels, state-corporate governance. Structurally, large banks and corporations have aggregated wealth and political power to the degree that they can enforce cartels and quasi-monopolies with a combination of market heft and regulatory capture (a complicit state enforces monopoly under the guise of consumer protection or other cover). The owners/managers of the cartels skim enormous profits while providing poor-quality products and services to consumers who have little choice in a rigged market.

Systemic incentives favor speculation, debt and leverage: those closest to the cheap-credit spigots (corporations, banks and financiers) can outbid everyone else to buy up the productive assets of the economy—assets that generate income and capital gains. These perverse incentives fuel speculative asset bubbles, misallocation of national wealth and malinvestment in marginal projects that are originated solely to reap short-term profit by any means available, which in a rigged system includes fraud, embezzlement, misrepresentation of risk, etc.

This dependence on rising speculation, debt, leverage and opaque gaming of the system is financialization.  Where the entire financial sector once represented 5% of the economy, now it is over 20% of the economy once we include financialization that’s hidden inside firms such as Apple, GE, etc.

Together, these form what I call the Plantation Economy, an asymmetric structure in which(…)

If you have not yet read Part 1: Drowning In The Money River, available free to all readers, please click here to read it first.

In Part 1, we compared official rates of inflation with hard data from the real world, and found that it’s not just the cost of burritos that has soared over 100% while inflation has supposedly been trundling along at 1% or 2% per year. The real killer is the soaring cost of big-ticket essentials such as rent, higher education and healthcare.

So what can we do about it? There are only a few strategies that can make a real difference: either qualify for subsidies (i.e. lower household income), own assets and income streams that keep up with real-world inflation, or radically reduce the cost structure of big-ticket household expenses.

Assets & Income Streams

One strategy to avoid being crushed by real-world inflation is to earn enough extra income to keep up with higher costs. This is problematic in an economy in which wages/salaries are declining as a share of the gross domestic product (GDP).

This is a long-term secular trend that is affecting not just middle-income workers but the highly educated technocrat/managerial class. This reality suggests that trying to earn more income via wages/salaries is akin to pushing sand uphill: it is possible, but it’s running up against powerful secular trends.

The alternative strategy is to seek assets and income streams that might increase purchasing more than wages/salaries.

The data speak volumes about the difference between wealthy households and middle-class households: the middle-class households’ primary asset is the family home, while the wealthy households’ primary asset is business equity: ownership of an enterprise or shares in enterprises.

Developing a profitable enterprise is easier said than done (it helps to inherit a family business), and there is no guarantee a business that’s successful today will still be successful next year.

Nonetheless, it’s striking that the middle class is heavily indebted, house-rich and business-equity poor, while the top 1% has little debt and is business equity-rich and relatively house-poor.

This is not to say it’s a poor investment to own a home, but it does suggest that you can beat the erosion of inflation by…