On the real wages issue you have to focus first on the relationship between inflation and interest rates. If you lend me $2 to buy a coke in the break room, but allow me to pay you back in 10 years, well — by then that 16oz bottle of coke will probably cost $4. So while I did pay you back the same nominal amount, in “real” terms I only paid you 1/2 of what you lent me.

So you would have to charge me $0.20 each year for those 10 years ($0.20 X 10 — $2.00). So I pay you $0.20 a year for 10 years and then pay you the original $2 back. You now have $4, and if that bottle of Coke costs $4 by then, you have recovered not the nominal amount of money ($2) but the real amount of money required to buy a bottle of Coke ($4). The $2 is the nominal amount of the debt; the $4 is the real amount.

So what is $0.20 / year on a $2 loan? A 10% rate of interest. That rate is how a lender protects the purchasing power of the money he/she is lending.

Now think about what would happen if we, being $22T in debt, had to pay an honest price for that money… It would be catastrophic. So in order to prop up the debt-fueled status quo, it is imperative that interest rates move ever downward. But interest rates are an output of rising prices in order to protect the purchasing power (i.e. the “real” value) of the money lent.

So today the Consumer Price Index is dominated (to the tune of 30% when calculating core inflation) by a guesstimate called “owners equivalent of rent of residence.” The brutal truth is it is one of numerous gimmicks to suppress the reported rate of inflation. Because if the we have an honest CPI, we will be forced to pay an honest price for money, and again, at $22T in debt, that would force Congress to make immensely tough and unpopular decisions.

Now when you suppress inflation reporting like that, you also suppress wages, which can be shown to track reported inflation. So if wage growth tracks reported inflation, which vastly understates real inflation, then “real” wages (not “nominal” wages) are actually declining. I am not a fan of trying to use the minimum wage as a tool of public policy (it doesn’t work), but the call for a $15 minimum wage is the logical response to the reality that “real” wages are declining.

Now for derivatives: First you have to understand a futures contract. Think of a forever stamp: It is a contract between you and the post office to send a first class letter. If you buy that stamp at $0.45 each, and then the first class rate goes up to $0.50, each stamp you bought at $0.45 represents a discount from the “spot price” (which has gone up to $0.50) of $0.05. Let’s say you bought 1,000 forever stamps at $0.45 (an outlay of $450). The first class rate goes to $0.50 so you find a buyer for your 1,000 stamps. You charge them $0.48 each ($480). Because the price per stamp is now $0.50, they would have to pay $500 at the spot price. But you offer them the chance to save $20. You made $30 on an outlay of $450 — a 6.67% return.

I use the forever stamp because it is easy to understand. Now (and here is where I put my data-systems hat on). Let’s say I can create the same basic system that is used to forecast the path and intensity of a hurricane, but I am going to forecast price movement in commodities like oil. Because my system can reliably tell me when prices are going to bottom out and then start moving up, I rush in and sign “futures contracts” to buy the commodity at the bottom price. I am not doing this because I can actually take that raw material and make something from it, but because I am going to sell that contract (like I would sell the stamps) once the price goes up. Basically I am going to sell the discount against the higher spot price.

That futures contract is a “derivative.” The value of the contract is the difference between the price I paid and the higher, later price. It is derived from the price movements of the underlying commodity. Now just think about what you can do if you have the technology to reliably predict those price movements!

Now imagine I create a company for no other purpose than using Big Data to forecast price activity across multiple commodities (e.g. oil, corn, rice, cattle, etc.) Notice that all of these things are base raw materials from which other things of value are created. I register my company, and then I issue a corporate bond to raise the funds to back my futures contracts in these commodities. Those corporate bonds are then traded as securities — they are a derivative of derivatives. I might even offer shares of stock in this company, making things even more complex…

So let’s back up and think about Blackjack. The odds being well known as they are, the longer you can stay at the table, the better your chances of winning are. So what happens when the Fed basically makes the chips free?

But it gets worse. What happens if you can bet on the overall results of a Blackjack table? Now you’re betting on the skill of the players at the table. What if you can bet on a collection of tables on the casino floor? And again, what if the window at the casino has so kindly chosen to make the chips free?

You now have a Russian Doll version of Blackjack. That is what the derivatives market is. And the chips are free… So now every dollar deployed to the Russian Doll version of Blackjack is a dollar lost to the factory where we could be becoming more productive, producing wage growth. But instead those dollars are in the casino, and the winnings are sunk into real estate — where the fraudulent CPI print is hiding real rent inflation.

No productivity because derivatives are sucking dry capital which otherwise would go to plant and equipment. Therefore no real wage growth. Rents are soaring, but going unreported because of the fraudulent CPI print.

And we are surprised by the homeless camps popping up everywhere?


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I am a charter member of the pocket-protector set, but old enough to make fun of them and otherwise have a healthy skepticism of tech. https://goo.gl/2z5Snr

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