As the agenda of the Deep State is all about government spending, its leaders are only too glad to profit from neo-Keynesian arguments that government spending should be increased. It is a measure of the success of the Deep State that the twenty-five biggest military contractors sell $235 billion per year of weapons and security services to the US government.
Equally, the policy of financial repression that robs middle-class savers with a regime of invisibly low interest rates not only subsidizes too-big-to-fail banks; it also facilitates greater government spending. As I write, net outlays for interest payments on the national debt are a bare fraction of what they would be in a normal interest rate environment.
In mid-1995, the Fed funds rate—the interest rate banks charge other banks when they lend each other cash—was as high as 6 percent, and all other interest rates were comparably higher. The total net interest paid to service the national debt then was $232.1 billion—more than 15 percent of federal outlays. At that time the national debt was $4.974 trillion, which was just 29 percent of its level at the end of fiscal year 2013 ($16.738 trillion). In 2013, with the Fed funds rate at 0.25 percent, debt service took 6 percent of federal outlays, or $222.8 billion—$9.3 billion less than in 1995.
History reminds us that extremely low interest rates will ultimately rebound to more normal levels. That would mean a jump in magnitude of the Fed funds rate. It would not be 0.25 percent—the historic average for the Fed funds rate is 4 percent. Obviously, the historically low interest rates secured by the too-big-to-fail banks also conveyed substantial benefits to the Deep State by permitting government spending for line items other than debt service to be higher than it would have been otherwise.
The national debt has more than tripled since 1995: total federal outlays have risen by 244 percent, yet thanks to QE and financial repression that drains the savings of America’s middle class, net interest payments on the national debt are lower than they were in the mid-1990s.
When interest rates rebound, the carrying costs of past deficits will balloon, crowding out other spending in the federal budget. This will likely lead to the emergence of more intense intra-elite competition, a factor identified by Peter Turchin and Sergey Nefedov as characteristic of the disintegrate phase of the Secular Cycle.
Deep State Disses the Tea Party
As Lofgren reminds us, the Deep State is crucially dependent on the appropriations process:
While it seems to float above the constitutional state, its essentially parasitic, extractive nature means that it is still tethered to the formal proceedings of governance. The Deep State thrives when there is tolerable functionality in the day-to-day operations of the federal government. As long as appropriations bills get passed on time, promotion lists get confirmed, black (i.e., secret) budgets get rubber-stamped, special tax subsidies for certain corporations are approved without controversy, as long as too many awkward questions are not asked, the gears of the hybrid state will mesh noiselessly. But when one house of Congress is taken over by tea party, life for the ruling class becomes more trying.
This highlights a puzzling contradiction in Lofgren’s thinking. He issues a clarion call to awaken the public to the dangers posed by the Deep State to “the visible, constitutional state . . . envisaged by Madison and the other Founders,” yet he paradoxically adopts a snarky attitude toward “the Tea Party,” the only effective expression of constitutional politics to yet pinch the Deep State’s siphon on the jugular of the body politic. Lofgren became a vitriolic critic of the Tea Party, likening it to “Frankenstein’s monster,” and deriding the tactics of fiscal brinksmanship that have threatened default on the national debt, and led to sequestration, and thus a partial defunding of the Deep State.
Which is it? Is he more alarmed by the dangers posed by the Deep State? Or, rather is he more piqued by the disruptions the Tea Party has imposed on the “functionality in the day-to-day operations of the federal government”? He tells us himself that the Tea Party has made life more trying for the Deep State (and also presumably for senior budget analysts who process national security appropriations). Lofgren says, “If there is anything the Deep State requires it is silent, uninterrupted cash flow and the confidence that things will go on as they have in the past. It is even willing to tolerate a degree of gridlock: Partisan mud wrestling over cultural issues may be a useful distraction from its agenda. But recent congressional antics involving sequestration, the government shutdown and the threat of default over the debt ceiling extension have been disrupting that equilibrium.”
On the one hand, Lofgren tells us that the status quo “equilibrium” should be disrupted. On the other, he has the Deep State insider’s contempt for the simple citizens who have gradually come to realize—a quarter of the century after the death of the Soviet Union—that the national security state has become an expensive scam they can no longer afford.
Lofgren’s unresolved cognitive dissonance is reflected in his confusions about where the Deep State ends and other elite interests begin. Let’s examine these more closely as they point to the likely emergence of more intense intra-elite competition, a factor identified by Peter Turchin and Sergey Nefedov, as characteristic of the disintegrate phase of the Secular Cycle. They argue that as states break down and bankruptcy approaches, the interests of various elite groups tend to diverge, leading to factional battles between patron-client groups.
Of course, so long as government spending capability was sufficiently abundant, the Deep State has good reason to avoid conflict with other privileged groups with the incentives and resources to effectively represent themselves politically. This explains the compliance of the Deep State with the prevailing economic orthodoxy. And it alone could account for the fact that the Deep State was content to allow the bankers lobby to control monetary policy. Further to that, the Deep State profited tremendously from the increase in government spending capacity achieved through quantitative easing.
It does not follow, however, that every consequence of current economic policy expresses the will or the interests of the Deep State (which should be understood as shorthand for crony capitalists with guns). And according to Olson’s trenchant analysis of the logic of group action, it is unlikely for a group as sprawling as the Deep State to formulate coherent policy perspectives in opposition to those adopted by other groups, whose perspective is adopted by the establishment of the moment, given that these are an amalgam of the self-interested viewpoints of the leading organizationally privileged groups in different areas.
Lofgren mistakes this “get along to go along” orthodoxy for evidence of a genuine ideology binding the denizens of the Deep State with Wall Street and Silicon Valley in a quasi-official ruling class. He suggests that they are deeply dyed in the hue of the official ideology of the governing class, an ideology that is neither specifically Democrat nor Republican. Domestically, whatever they might privately believe about essentially diversionary social issues, such as abortion or gay marriage, they almost invariably believe in the Washington Consensus: financialization, outsourcing, privatization, deregulation, and the commodifying of labor. “Internationally, they espouse twenty-first-century American exceptionalism: the right and duty of the United States to meddle in every region of the world with coercive diplomacy and boots on the ground and to ignore civilized behavior.”
In case you’re not up to date with your Marxist jargon, “commodifying of labor” is a concept Marx developed in The Communist Manifesto, where he decried “the callous cash payment” that transforms the labor of workers into just another cost of the production process.10 For my part, I’ve never understood what the fuss was about. It seems to me that recognition that labor is a cost of the production process is not so much an ideological artifact as it is rudimentary accounting. No economic system could fail to take it into consideration. And as to the “callous cash payment,” most people think of that as the good part.
The fact that Lofgren lists “commodifying of labor” as a key f
eature “of the official ideology of the governing class,” tells us more about his discontents than it does about the views and postures of the elite. As we look more carefully, you can see the potential for looming, intra-elite conflict.
Such is all but assured by the fundamental divergence of interests between the “essentially parasitic, extractive nature” of the Deep State (tax consumers) and the entrepreneurial focus of the more productive (tax paying) segments of the fabled 1 percent.
The utter impossibility of meeting all financial claims on future production in a flat line economy will be ever more obvious as we totter toward the Breaking Point. And this will trigger a more acrimonious intra-elite conflict along the lines delineated below.
Is the Deep State Working with Russia?
In an eerie echo of the Cold War, the conflict of interest likely to trigger intra-elite fighting arises from an anachronistic ambition that the Deep State shares with Russia’s strongman, Vladimir Putin.
Both the Deep State and Putin want to nationalize their elites. Putin is utilizing sanctions handed to him by the Deep State over the crisis in Ukraine to ring-fence Russia’s tycoons. These sanctions will help keep Russian money bottled up within the borders of the country rather than chasing opportunities across the whole global economy, as Russia’s richest billionaire, Alisher Usmanov, has famously done with major stakes in Apple, Facebook, and Alibaba.
Equally, the Deep State’s prosperity is threatened by the globalization of America’s investment elites. As authoritarian policies like FATCA show, the Deep State wants to close off options for Americans to live and build businesses outside the borders of the United States. This entails a major conflict with the interests of a considerable portion of the 1 percent who embrace the technologically driven globalization of industry and services. They don’t want to keep losing business because customers of American technology products don’t want the Deep State spying on everything they do. As reported in the New York Times, revelations about Deep State spying have already cost American technology companies billions.
Maria Rankka, CEO of the Stockholm Chamber of Commerce, says the balkanization of the World Wide Web, in response to US data surveillance policies, threatens to destroy “the borderless character of the digital economy,” jeopardizing between $4 trillion and $11 trillion in gains to the global economy by 2025.11
As globalization has developed, many markets around the world have come to be dominated by transnational companies, the top one hundred of which are 85 percent owned by American shareholders. As examples such as the Apple iPhone, iPod, and iPad so vividly demonstrate, even much of China’s growing industrial production is deployed in the service of American companies.
In a February 2014 Politico article, Sean Starrs, a PhD student at York University in Toronto, pointed out that despite China becoming the largest PC market in the world, American firms still command 84 percent of the profit share in computer hardware and software.12 It is not only the tech sector that knows it can make higher profits by operating across jurisdictions. The whole market-oriented contingent of investors and high earners are unlikely to welcome Deep State efforts to perpetuate international conflicts and the declining marginal returns they engender.
But this is a story that will more fully unfold tomorrow.
QE Forestalls Intra-Elite Conflict?
Meanwhile, a little-noted consequence of QE has been to temporarily forestall the endgame intra-elite conflict by conveying substantial gains to both the Deep State and the larger, more globalized segments of the vaunted 1 percent.
The key to understanding how QE defers intra-elite conflict is to recognize that the Federal Reserve’s choice to divert the savings returns of middle-class Americans, to fatten the balance sheets of banks, was a desperate measure to preserve a status quo, one dependent on rising debt to fund government deficits at a scale that private savings could not support. It was not altogether an accident that this fattened the balance sheets of the 1 percent as well. The central bankers were hoping to stimulate a wealth effect. As Dallas Fed president Richard W. Fisher was widely credited with saying, “QE was a massive gift intended to boost wealth.”
When the Fed essentially monetizes stock indices, the owners of stocks tend to get richer. This is true quite apart from whether they mainly own stock in firms that prosper in the crucible of market competition or they’ve invested in crony capitalist ventures that profit from government contracts and favors.
That this wealth effect tended not to trickle very far down the income distribution to reach the bottom 80 percent of the population reflects the fact that middle-class finances have already been hollowed out since the signal crisis of US hegemony in the 1970s. Due to the tendency of the middle class to invest in housing stock in preference to corporate stock, middle-class families were much more adversely affected by the subprime mortgage bust than were wealthier persons. In the housing bubble of the last decade, home prices rose sharply due to the abracadabra of cheap money conjured out of thin air by the Federal Reserve. In response, median households with stagnant income drew down their housing equity by extracting an average of $1 trillion annually, in excess of closing costs and satisfaction of previous mortgages, between 2001 and 2005.
You don’t need to be a Nobel prize–winning economist to see that going deeply into debt on the basis of inflated values spells trouble. As Joseph Stiglitz argued in a January 2013 New York Times piece, the growth in the decade before the crisis was unsustainable, reliant on the bottom 80 percent consuming about 110 percent of their income.13 The excess consumption was financed by “free cash” mortgage refinance as described above.
When the housing bubble burst, household net worth in the United States fell by $16 trillion. Because middle-class households were seven times more exposed to housing, which comprised two-thirds of their wealth before the bust, they were much more adversely affected than the 1 percent with more diversified portfolios. The 1 percent held 90 percent of their assets in stocks, securities, and business equity rather than in homes.
When the penultimate bubble burst, the bottom 80 percent lost, on average, 39.1 percent of their net worth between 2007 and 2010. By contrast, the top 20 percent lost an average of just 14 percent of their net worth. They made this up, and more, from gains in the stock market. While housing prices only began to rebound in 2012, the S&P 500 rose 60 percent between March 2009 and the end of 2010 alone. As the much-maligned top 1 percent owned 50.9 percent of the stocks in America, they made a lot of money from the bull market stimulated by QE, pocketing, according to David Cay Johnston, 95 cents out of every dollar of income growth from 2009 through 2012.
So while by some estimates household net worth has rebounded by $16 trillion since 2008, most of it rebounded to the top 1 percent, who owned most of the stock that soared in value. But if you’re one of the top 1 percent yourself, you may recognize that’s not all it’s cracked up to be.
As Phil DeMuth explored in The Terrible Tragedy of Income Inequality among the 1%, you may be part of the 1 percent without being a fabled tycoon like Warren Buffet, George Soros, Peter Thiel, or Donald Trump.14 In fact, DeMuth points out that about half of the 1 percent are small business owners and professional practitioners, such as doctors and lawyers. Still, according to DeMuth, even the bottom ranks of the 1 percent hold, on average, about $1.5 million in liquid assets.
To really achieve what my friend Bill Bonner calls “financial escape velocity,” you need to be, at a minimum in the top one-tenth of 1 percent. DeMuth puts it this way: once you achieve an annual income of $1.9 million, then you “start to escape earth’s monetary gravitational field.” Even then, you won’t be “Hollywood rich” until you reach the top one-hundredth of the 1 percent, making at least $10.2 million per year.
Apart from the president of the United States, very few government employees would qualify for even the lower ranks of the 1 percent. And that may be part of what irks Lofgren about the Deep State: he was a firsthand witness to
the “revolving door” deals that reward government operatives with a second career, lucrative beyond their dreams. He jumps to the conclusion that because money is available to grease the wheels of this lucrative revolving door, Wall Street must be “the ultimate owner of the Deep State and its strategies.”
I don’t think so.
It isn’t really Wall Street that funds the Deep State. That money is drained from your pockets and those of the US citizenry through the political process. Wall Street merely capitalizes the income streams that pour into Deep State companies. Almost without exception, the twenty-five biggest defense contractors are public companies. Their CEOs and other executives earn salaries that, in most cases, put them high into the upper rungs of the 1 percent. And the public listings offer added options for lucrative Deep State rewards.
The antics of the Deep State are among the hardest to parse and decipher in the contemporary world of crony capitalism, as they are shrouded in a gauze of secrecy; this makes it all but impossible for you to know with how many groups the war on terror is being fought (that number is top secret), much less the names of these groups.
Edward Snowden, a computer geek and high school dropout earned $200,000 a year at Booz Allen Hamilton (NYSE: BAH) (enough to place him in the top 5 percent of the income distribution), pulled back the curtain and revealed some of these details.
He showed that BAH, with a market cap of $3.25 billion, seems to have designed much of the strategy and tactics of the war on terror. BAH even originated and helped implement the National Security Agency’s plan to spy without a warrant on all your conversations, read your emails, and record every detail of your electronic life—or as Snowden put it in his sensational revelations, “to hack into the entire world.”
The Breaking Point Page 26
