The Correction to the Correction

Retirement and Wall Street or 'Fictitious Capital Becomes Even More Fictitious'

Retirement in the U.S. has already been partially privatized.  Half of workers have access to 401Ks at work through large employers (14%), but only 40% of that group contributes. 10% of workers have a ‘defined benefit’ pension. But those pension funds are invested in ‘non-defined’ securities!  More working-class money is invested in IRAs than 401Ks.  In 2012 38% of workers had an IRA, though many don’t contribute each year.  Many state pension plans are also chest-deep in the ‘big muddy’ and will result in tax issues if they fall short due to market losses.  Remember the stability of CDs?

The DOW in January-February 2018...so far

Just as education is now being partially privatized through the charter school movement, the finance sector has grabbed billions of dollars in individual retirement funds through pensions, IRAs and 401Ks/403Bs.  We see the result, as losses accumulate to retirement accounts and ‘defined pension plans’ through the finance arbitrage of Wall Street this week.  Every single market took huge losses in ‘the correction’ ... not a Jonathan Franzen novel this time. Two DOW drops of over a 1,000 points in one week is a record.  But then when workers get raises (as reported in January), the investor class gets the sweats.

One sector that collapsed on Monday was the VIX, a derivatives market based on volatility.  It was funded on bets about market fluctuations!   Another related sector of Exchange Traded funds – ETFs – based on bank loans, also is vulnerable, as they are not liquid.  Other losses were in ‘junk’ bonds (high yield corporate bonds) which finance highly indebted corporations.  Stock buybacks from corporations were part of the rout, as they created a false sense of stability.  And credit default swaps are back, as they are being bought at high rates to ‘insure’ against losses. Even collaterized debt obligations, which played a role in 2008, continue in this market.  FINRA and the SEC have turned a blind eye to these absurd derivative ‘products,’ and are merely enablers at this point.

The top 10% of the population holds 84% of the stocks and bonds, which shows who has control of the fictitious but real wealth.  It might be good that more workers are not putting hard-earned dollars into this racket, as 401Ks and IRAs.  As this statistic shows, they are both not living up to their hype for ‘protecting’ retirement for the working class as a whole.  And to think at one point both parties were moving towards privatizing social security, the only thing between millions of retirees and poverty! Of course, their plans have not ended, as they will continue to try to whittle down Social Security and Medicare/Medicaid because of 'deficits.'  Contributions to IRAs and 401Ks are down across the board over the years, reflecting the debt load so many workers are feeling.   This is the reality of privatization.  Privatizing 'retirement' is no better than privatized health care.

The markets are how the rich get richer ‘in their sleep’ and certainly, anyone with a 401K or IRA in the years since the 2008 market collapse has seen earnings rise to ridiculous levels.  Unfortunately, this is one way the upper level of the working class has to try to stay ahead in the ‘American game.’  This bubble was further blown up by Trump’s tax giveaway to the rich in January, which seemed to usher in a period of jubilation for corporate America.  Money was then plowed into stock buybacks.  Instead the ‘ticking time bombs’ (Businessweek’s phrase) in the market exploded.   Trillions have been wiped off the books worldwide.

The next shoe to drop is what corporations or finance companies will go bankrupt as their leverage disappears and they have to pay their debts.  The 3 Chinese stock markets have taken even heavier losses, which should put a deserved dent in the power of upcoming Chinese capitalists.  Internationally, trillions in corporate, national and private debt are waiting in the wings.

At the same time the Republicans and a small group of Democrats are unwinding the wimpy ‘Frank-Dodd’ act related to bank stress tests, capital requirements and trading restrictions.  Frank-Dodd never addressed several roots of the real problem, especially the repeal of Glass-Steagall and failing to repeal the Clinton-era 2000 CMFA act that gave free rein to derivatives.  All of this will lead to an even bigger financial collapse in the future, based on inability to pay for losses that will make 2008 look like a dress rehearsal.

But the real issue is that capital (and its two parties) cannot return to the past.  It cannot ‘reinstate’ Glass Steagall or repeal CMFA because its whole economic functioning globally would be in danger.  Until capital itself is dethroned from power, its “Iron” throne will require no restrictions on capital whatsoever.  The past is not coming back…

So the outlook for ‘retirement’ of workers is unstable.  Postponing retirement, working a part time job – all impact younger workers trying to earn a living too.   Capitalism is not interested in security. It is constantly in turmoil, at faster and faster speeds. Even the program trading / artificial intelligence algorithms driving this down market reflect that. This problem is because of its own internal contradictions, which cannot be overcome in the present ‘market’ economy.  And by 'market' I mean the aggregate opinion of many capitalists.

Prior review:  Lewis' "Flash Boys" and other books on Wall Street.

Red Frog

February 9, 2018