Newsletter 8: Fed's Pickle, Blackbox Manufacturing, Right Ascending

My long term goal is to reach a sufficient number of thought leaders so that the Rightish Silo and Leftish Silo narratives are disrupted.  As  you will likely discern over time, neither is worthy of serious consideration.  Certainly, some of these unsupportable narratives involve technology, but at its core it relies upon people's misunderstanding of Economics, Political Philosophy, Sociology, etc.  So, I will regularly return to explaining the principles and mechanics of these subjects.

For those who have not read, 'Intellectual Sophistication' I hope you put it on your reading list.  If you have not yet read it, I want to clarify that I am not a high IQ guy.  Intelligence is necessary, but not sufficient, when it comes to producing high quality intellectual product.  The core of intellectual sophistication is comprised of erudition, objectivity and discipline.  If one is less than impressive in one's intellectual sophistication it is likely the result of a deficiency in a couple of components, of which one may not be intelligence.  As I have pointed out several times, high IQ societies tend to attract high IQ, low intellectual sophistication people, while Academia tends to attract people educated beyond their intelligence. 

The Pickle the Fed (and Euro central bank) Are In

As I have said over and over; if legislatures spend more than the Real GDP+the Central Bank's target inflation rate, the Central Bank is put in a no win situation.  It has a choice of either 'printing money' and thus exceeding the inflation rate or allowing interest rates to rise and likely instigating a recession.  In 2021, that magic number was about 800 billion USD in the U.S. and about the same in the Eurozone.  The actual U.S. Federal Deficit was 2.8 trillion USD.  If the Central Bank monetizes the excess, inflation explodes.  The Fed and the Eurozone Central Bank, both in fact, monetized the deficit and, as a consequence,  inflation has been exploding.  The 'pickle' is that if the Fed doesn't buy Treasuries, then the excess 2.0 trillion USD will flow through to auction and interest rates will skyrocket.

There are a few dynamics that complexifies this.  First, there is a proper relationship between inflation and interest rates on Treasuries, especially the 10 year bond.  The reason is because it historically has been the first choice among several lesser options to park one's unutilized financial resources.  It has been marginally more attractive than gold because 1) gold carries no official return and 2) gains, unlike for Treasuries, are not exempt from taxation.  Of course, other governments issue similar debt instruments.  If the interest rate on 10 year Treasuries is too far below the inflation rate, people find other options, often off shore. 

As a store of value, the sensible rule of thumb should be that the 10 year Treasury interest rate should exactly reimburse the holder for loss of purchasing power through inflation of USD.  Currently, inflation is at 8.6%, however, 10 year Treasuries are currently yielding 3.1%.  However, as the Fed sells its inventory of Treasuries, M2 will fall and so will inflation.  It is not necessarily the case where the two will meet in the middle.  However, if it does, that point will be around 5.9%.  That interest rate will substantially increase the cost of financed assets, such as houses and cars, which, in turn, will likely result in a recession.

Since the Eurozone is in the same situation, the coming recession will be global.  Of course, 5.9% inflation and interest rates are not optimal.  Fortunately, the Fed still has a whole lot of Treasuries to sell and by not buying new ones, money supply will likely fall and with it, inflation.  It is generally taken that an inflation rate of 2% is optimal.  There are several reasons for that.  First, deflation is harmful and, because monetary policy is not completely accurate, a little inflation as a safety margin is wise.  Second, while people don't like inflation, it is actually economically stimulative.  Here is a simple example.  Suppose you buy a house for 200K USD and you have P&I of $1,200 per month.  Next year, there is 5% inflation and so, your income of $3,600 increases by 5% to $3,780.  Your P&I did not increase by 5%, so, assuming that everything else stayed at 5%, you have an additional $1,200X5%=$60 per month of purchasing power.  So, you spend it and that stimulates the economy by increasing demand.

So, if Congress limits the deficit to around $800 billion, inflationary pressure will subside and return to 2% relatively quickly.  However, that can only happen after the current extra $2 trillion of spending can be wrung out of the system and that can't happen without a bout of increasing inflation and interest rates and a recession.  By the way, the U.S. was in a very similar situation at the end of the 1970s and that was precisely how it was solved.  It was painful, but there seems to be no alternative.

Despite all the rhetoric on both sides and the hostility toward the Fed, the fact is that the FOMC is moving, albeit a bit late, in a prudent and proper way.  However, that does not defuse the pickle and a recession can only be moderated, not avoided.

Blackbox Manufacturing is Coming

Blackbox Manufacturing is a term that I coined in a 1970 term paper.  In it, I imagined that robotic trucks would bring raw materials to a factory where robotic forklifts would unload it and put it on pallet racking.  When the time came, a robotic forklift would bring it to the assembly line where robots would assemble the parts into finished goods.  Robotic forklifts would bring the finished goods to a picking line where other robots would assemble orders entered by computers.  Robotic forklifts would bring the completed orders to the shipping dock where they would be loaded onto robotic trucks and be taken to their final destination.  I predicted that it would be feasible in about 50 years.  That was 52 years ago, my prediction was close.

Obviously, I called it a black box because raw materials go in and finished goods go out and there is no human intervention in between.  Now that it is an eventuality generally accepted, it is being called, 'Lights Off Manufacturing'. This is critical to understanding the near future, because this is not science fiction; it is feasible today.  Foxconn attempted to fully automate the assembly of Apple products.  They were unsuccessful, but they were close and it was far more challenging that, say, manufacturing shampoo.  Such less demanding automation are being implemented and many are predicting their almost universal use in the near future. 

During the Agricultural Age, farming was the most common job and it occupied over half the population.  Today, it employs only about 2% of the population.  At that time, rather than farming, people worked in factories making products.  Now, with black box manufacturing, the number of people engaged in manufacturing will also likely fall to around 2%.  This has actually already started with only about 10% of the workers engaged in manufacturing today.  Already, most people are engaged in the processing of information or providing services.  In the past, the primary information jobs have been dubbed 'pink collar' and services have been dominated by low wage hospitality jobs.  Because of this, non-systems thinkers, which sadly comprises most of the MSM, have predicted the death of the middle class.  They imagine an economy that is dominated by minimum wage service workers.

Because of this, in my group, Polymathica, I use this banner.  Its message is that while the middle class is in fact disappearing, the majority of those leaving are rising to the upper class, not falling to the lower class.  It is also worth noting that the fastest growing group are households with incomes in excess of 200,000 2020USD.  These are the Information Age independent workers that I talk about, one might say incessantly, when I discuss the proper careers for Polymathicans.

There is growing discussion of UBI (universal basic income) and the justification is often the misplaced belief that automation will result in 50% or higher unemployment rate and the massive replacement of humans by machines over the next few decades.  While it is true that automation is about to explode, the belief that it will lead to enormous unemployment is called 'The Luddite Fallacy' referring to the belief, in the early 1800s, that power looms would result in massive unemployment.  Despite 200 years of disproof of this concern, the Internet is full of essays proclaiming that 'this time is different'.  It isn't. 

Consider an economy that has a GDP of one trillion dollars and a worker population of ten million.  That means that the average worker has an annual added value of one hundred thousand dollars.  Now suppose that through automation, the average worker has an added value of two hundred thousand dollars.  It could be that GDP would remain at one trillion dollars, but the number of workers will fall to five million.  The unemployment rate is now 50%.  That is not what happens.  Rather, the number of workers falls, but then rises again to one hundred thousand.  However, GDP is now two trillion dollars.  So, the standard of living doubles.

As we saw in the above graph, the extra one trillion dollars is not spread equally.  It mostly goes to decreasing the number of poor people and increasing the income and number of households at the very highest level.  This is why, in the past 70 years, GDP per capita has increased substantially, but the median household income has increased only slightly.  The 50%'ile person is not the same person as 70 years ago, but their value added is about the same.

An important thing to understand is that the middle class will continue to disappear.  We are headed toward a bimodal, rather than trimodal, economy, with service workers at the bottom and owners, innovators, and deciders at the upper end.  The lower class, which, oddly, will include Physicians, Architects, Attorneys, but also wait staff, gardeners, beauticians, etc., will comprise about 80% of the labor force while the upper class will comprise the other 20%.  The result is much better than it might initially appear.

The High Industrial Age began around 1875 and continued to about 1995.  That is the beginning of the Information Age.  In 1875, according to Measuring Worth, the average GDP/capita was 3,506 2012USD.  By 1995, the average GDP/capita has increased to 39,900 2012 USD.  So, during that 120 years, standards of living seem to have increased 11.38X.  Standards of living will increase by a similar amount during the Information Age, but it will take, perhaps, half that long.  So, we would project that GDP/capita will increase to around 450,000 2012USD or about 863,000 2021USD.  If we use Pareto, we will conclude that the upper class will have an income of around 3,500,000 2021USD and the lower class will have an income of around 215,000.  This assumes, unrealistically, that no government efforts would be employed to decrease income disparity.

This process, actually, has already started.  Recently, the 'great resignation' has been reported in the news.  Obviously, some of these resigners simply had stimulus money in their pockets and decided to spend it on a little vacation and a search for another job.  However, many are likely responding to the spate of advertisements touting the opportunities to work independently.  They got a taste of it during the COVID-19 lock downs, decided they liked it and are pursuing the 'opportunities' being advertised.

How the economy of the Information Age will differ from the Industrial Age is extremely complex.  Consequently, I am working on a book entitled, 'The Death of Capitalism: Information Age Economics'.  By this, I do not mean a rise of Socialism.  Rather, I mean that imagination, connectivity, creativity, and quality judgment will replace Capital as the 'Wealth of Nations'.  Peter Diamandis argues for a coming 'Age of Abundance' and, while likely misguided in many of its details, is spot on with regard to the changes that automation will bring to society.

EUNA Is Moving Right

I know that it sounds like tin-foil conspiracy theory, but there is, in fact, a well developed, self identified power structure that spans all of the EU and North America.  Many on the Right call it 'The Party of Davos' and in the U.S. is often referred to as 'The UniParty'.  The term 'Party of Davos' refers to the World Economic Forum, an organization supported primarily by 1,000 multinational corporations.  It has 3,000 members who are mostly large investors, business leaders, political leaders, economists, celebrities and journalists.  While hardly the only mechanism for coordination and cooperation of the elites across the world, it is likely the most visible.  It describes its mission as "improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas".

There is also the Bilderberg Meeting and the Trilateral Commission, both of which have been frequently mentioned in conspiracy theories.  Again, they rather blatantly state their purpose is to coordinate the efforts of elites.  However, because of its size, corporate funding and the inflammatory headlines that have described past meetings, most notably the 2020 'Great Reset', WEF has come to the forefront and become the focus of a growing, global populist, nationalist movement.  Given a constituency of billionaires and national leaders, it is difficult to refute the charge that its aims are nothing less than a global plutocracy.

While integral to the current socio-political dynamic of much of EUNA, Davos is only a part of the whole.  There is, simultaneously, a renaissance of conservative values among the young.  Also, since voters become about .38% more conservative per year, as populations age, they can become dominated by conservative voters.   A third phenomenon is that people tend to vote like their parents and conservatives have more children than liberals.  For these reasons, Liberals, who have controlled the politics of most of EUNA since WWII, are losing control of the political dialogue.

'The Great Replacement' theory says that Liberals are intentionally importing refugee masses with the intent to get them the right to vote so that, presumably, they will give Liberals a more or less permanent majority.  Is this true?  It is not easily proved or disproved.  However, there is little doubt that both the U.S. and Europe are being flooded with immigrants.  In both Eastern Europe and Southern U.S. this flood of immigrants is creating a backlash.  So, whether the flood of immigrants was an intentional effort to dilute 'white voters' or not, it is creating a conservative, nationalist, populist movement.

I will grant that those who are in favor of large refugee populations entering EUNA do so for ideological reasons.  In other words, they may be properly moved by the political and economic privations of Syrians when they allow them to move to Europe or for Venezuelans when they allow them to move to U.S.  However, it does mean that the expatriated Middle East and Latin America expatriated residents are increasing the percentage of the population without a strong Enlightenment heritage.  However, it is not necessarily the case that, if they gain voting rights, either officially or surreptitiously, that they will support the Liberal side.  There is no doubt that the Liberal side thinks so, but the data is starting to question that premise.

There is, however, a danger that the Left may, ultimately, be hoisted by their own petard.  In both cases, whether the Muslim refugees in Europe or the Latin refugees in the U.S., they may be of a more Socialist world view, they are culturally very conservative.  While, in the U.S., the Democrats thought that they could turn Texas blue because of the increasing Hispanic population.  However, the Hispanics are now voting culture and are moving to the Republicans.

Lastly, in the American inner cities, a growing number of residents are coming to realize that Leftish policies are mostly to blame for the squalid conditions within which they live.  As all Hispanics are moving Right, so are black males. 

Watershed moments just took place in both France and the U.S.  While Macron won re-electiion over Marine Le Pen by a comfortable margin, though much less than in prior elections.  However, the Liberals lost control of the French legislature to the more Conservative parties.  In the U.S., there have been several interim elections that went the Republican way.  However, Hispanic Republican candidate, Mayra Flores, beat the Hispanic Democrat candidate, Dan Sanchez by nearly 8%.  What makes this such a significant harbinger is that Biden won the District by nearly 15%.  It suggests, especially in Districts and States with large Latin population, that no previous Democrat win makes the seat safe.

We should not ignore the traditionally Christian Conservative nations of Eastern Europe.  They are not necessarily becoming Conservative, but they appear to becoming more intransigent to more Liberal policies of the EU.  The focus has been on Hungary where long term President Viktor Orban has been increasingly at odds with Brussels.  While the EU has emphasized what they consider to be human rights violations, the Hungarians perceive the conflict to be more over their Christian Nationalist values, specifically over anti LGBTQI+ and forced acceptance of Middle Eastern refugees.

However, the EU is having a Conservative backlash over all of Eastern Europe.  Abortion in Poland is legal only in cases when the pregnancy is a result of a criminal act or when the woman's life or health is at risk.  This stands in stark contrast to the general abortion rights.  Also, about 1/3 of Poland, in the Southeast, is an LGBT-free zone.  Due to this, the EU is withholding some funding.  Also, Poland was the major safe-haven for Ukrainians, it pushed back on accepting refugees from the Middle East, suggesting, if not nationalist sentiments, a greater Slavic solidarity.  Combined with a much more Christian sensibility, there is, if not a move Right, a more strident expression of a Conservative set of values.

We see that the interaction of many factors are all causing a cultural and political sea change over most of EUNA.  That does not mean that there will be an eradication of the Left.  Rather, we will see a more balanced and, hopefully, tolerant distribution of empowered subcultures.

Recent Supreme Court Decisions

Two major Supreme Court decisions on gun rights and abortion were released in the last few days.  It is a lot of reading and I have not yet assimilated all of the opinions, much less thought critically about it.  However, on an initial skim, I will likely take umbrage to both majority and minority opinions on both decisions.

As I end every newsletter, please register, if you have not and share either way.  We are growing at a gratifying rate and initial analysis indicates that the growth is exponential rather than linear.  Consequently, within a year we can possibly reach the point where we can exert meaningful influence on the public discourse.