Opinion

Felix Salmon

Learning from Peter Thiel

Felix Salmon
Jan 12, 2011 17:45 UTC

Peter Thiel’s hedge fund, Clarium Capital, ain’t doing so well. Its assets under management are down 90% from their peak, and total returns from the high point are -65%.

Thiel is smart, successful, rich, well-connected, and on top of all that his calls have actually been right:

In investor letters and interviews, some predating the global financial crisis, Thiel identified three broad economic bets he planned to let ride: 30-year U.S. Treasury bonds would rise as the U.S. economy slows and deflation sets in; the dollar would strengthen against the euro as investors scale back investments in emerging markets funded by borrowing dollars; and energy stocks would climb along with oil prices as production peaks.

None of that, clearly, was enough for Clarium to make money on its trades: the fund was undone by volatility and weakness in risk management.

There are a few lessons to learn here.

Firstly, just because someone is a Silicon Valley gazillionaire, or any kind of successful entrepreneur for that matter, doesn’t mean they should be trusted with other people’s money.

Secondly, being smart is a great way of getting in to a lot of trouble as an investor. In order to make money in the markets, you need a weird combination of arrogance and insecurity. Arrogance on its own is fatal, but it’s also endemic to people in Silicon Valley who are convinced that they’re rich because they’re smart, and that since they’re still smart, they can and will therefore get richer still.

Thirdly, getting big macro calls right is all well and good, but it’s as likely to lose you money as it is to make you money.

Fourthly, hedge funds need to hedge—or at the very least to put hard stop-losses in place when they enter into a trade.

And finally, if you invest for “the intellectual challenge” rather than to make lots of money, you’ll get what you wished for.

There’s a lesson here for hedge funds looking to pick up brainiacs like Larry Summers—another smart, arrogant, and well-connected person with big financial ambitions—when they exit the government’s revolving door. Summers made a hefty multi-million-dollar salary when he was at DE Shaw, but it’s worth remembering that when he was actually in charge of running money himself, he put Harvard into a series of disastrous interest-rate swaps which ended up losing the university $1 billion. If you want positive investment returns, rather than proximity to people with geek-celebrity status, the likes of Thiel and Summers are probably best avoided.

COMMENT

@jswede, ok, but his total returns from the high point are still down 65%. It wasn’t just, or even mostly, redemptions that caused the fund to shrink.

Felix’s post doesn’t mention anything about 12% per year, so I don’t know if you are cherry picking – when did the fund start? If he is so smart, how come he didn’t see the 65% decline from the peak coming?

Posted by OnTheTimes | Report as abusive

Why do we have a debt ceiling?

Felix Salmon
Jan 12, 2011 16:04 UTC

Can someone please explain to me why we have a debt ceiling at all? Its existence seems to violate every tenet of risk management and good governance.

James Hamilton put it well back in 2006:

One of the peculiar embarrassments of the American political process is the fact that Congress votes separately on the deficit and debt, as if they were two different decisions…

If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default. The greater the likelihood markets attach to such an event, the higher will be the interest rate the government has to pay on Treasury debt. A politician who votes for the spending and tax measures that produced the deficit but against a debt ceiling consistent with these is deliberately wasting taxpayer dollars for no purpose other than to grandstand before voters as a “fiscal conservative”. Anyone playing such a game has complete contempt for the intelligence of their constituents.

Looked at another way, this has very little to do with hypocrisy or the voting records of individual legislators. Instead, it’s a built-in systemic stupidity: the existence of the debt ceiling can cause lots of harm, while it does no good whatsoever. As a result, at the margin it will always needlessly raise US borrowing costs, at least by some small amount.

But it’s worse than that—not only is the debt ceiling an utter idiocy, it’s also extremely popular, in a way which only serves to ratify any contempt which US politicians have for the intelligence of their constituents:

71 percent of those surveyed oppose increasing the borrowing authority…

Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.

Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection.

There’s no particular reason why the US public needs to have a reasonably sophisticated understanding of credit spreads, default risk, and the federal budget. I daresay that lots of people genuinely believe that if you cut back foreign aid and tax collection, that would obviate the need to raise the debt ceiling. But the consequence of this is that it gives a real incentive to politicians to vote against raising the debt ceiling, and to attack their opponents, in elections, for repeatedly voting for such a raise.

In other countries, hard limits on debt issuance or total debt or debt servicing costs constitute a serious fiscal commitment and credit risk. In the US, they’re a political distraction at best, and a massive potential tail risk at worst. I’d love to know how this bonkers system came to be, and whether there’s any way of getting rid of it.

Update: Wikipedia tells me that the debt ceiling was introduced to replace a system where Congress approved every debt issuance individually. Which makes sense as a halfway-house on the road to getting rid of this silly constraint completely.

COMMENT

Apparently the journalist wasn’t around doing the Bush Years. When they were spending and borrowing like there was no tomorrow. Just think what the national debt would be now if there wasn’t a debt ceiling.

The US National Debt would be over $100 TRILLION DOLLARS, if Cheney and Bush had their way.

Posted by austin4 | Report as abusive

Should you open an FDIC-insured yuan bank account?

Felix Salmon
Jan 12, 2011 14:52 UTC

I’ve been looking at the instructions for opening a yuan bank account here in New York; it seems very easy indeed. Just like a normal US dollar account, it’s FDIC insured, and it pays no interest. So, should New Yorkers with dollar savings convert some part of them to yuan?

On the face of it, the trade is a reasonably attractive one. The Secretary of the Treasury is still complaining loudly that the yuan is undervalued, which means that when you buy it at the current exchange rate, you’re getting a bargain. A Chinese revaluation is going to happen at some point, and when it does, you’ll make money.

On top of that, there’s a simple diversification benefit. The dollar is still the main global currency, but there’s no harm in putting a few eggs in various different baskets just in case.

It’s possible that you’d be better off staying in dollars, of course. Inflation in China is rising, and if the Chinese central bank fails to bring inflation under control, then the real exchange rate could appreciate substantially even if the nominal exchange rate doesn’t move. On the other hand, if the Chinese central bank does bring inflation under control, it will do so by tightening monetary policy, which will put even more upward pressure on the yuan.

It seems to me that the downside is limited, here. As Standard Chartered’s Robert Minikin told Chris Nicholson, “China sees the global financial system as too U.S.-centric and dollar dependent.” As a result, it has every incentive to do reasonably well by those buying yuan, even if China itself is still buying dollars at a rate of $2 billion a day.

The news of the existence of this bank account is only spreading now, but in fact it has been available for the best part of a year already, over which period a saver would have done pretty well, in dollar terms. My feeling is that nothing has really changed, and that if the yuan appreciates by say 6% this year, that’s still a much better return than you’ll get on any dollar CD.

COMMENT

Well I guess we now know that the WSJ reads your blog.

@Chris_Gaun
chrisgaun@gmail.com

Posted by Chris_Gaun | Report as abusive

Counterparties

Felix Salmon
Jan 12, 2011 07:01 UTC

Look at how much Belgian CDS have gapped out since Thanksgiving on no new news — Reuters

What if utility and happiness are unrelated? — The Money Illusion

The World Erotic Art Museum sues Thomas Hawk for $2 million for taking photos there — Thomas Hawk

Unsurprisingly, I agree with Carney contra Laurie Goodman on whether Mass banks can get their legal papers in order — CNBC

Irin Carmon dismantles Caitlin Flanagan — Jezebel

COMMENT

In theory, Laurie Goodman should be right.

However, it implies a certain level of competence on the banks’ part in at least rudimentary record keeping. The one consistent lesson from the past four years is: “The banks couldn’t possibly have been this incompetent!…..Oh, I guess they could.”

I wonder if is possible that some of the unscrupulous (rare, I am sure) recorded title holders could realize how badly messed up the banks’ documentation are and make a grab for the foreclosure themselves as the current official holder. I am sure that it would make for ugly legal theater, but probably could up the ante that the trustee would need to fork over to get a clean assignment, especially if a bankrupt entity like Lehman was the middle man.

Posted by ErnieD | Report as abusive

Why do we need maturity transformation?

Felix Salmon
Jan 12, 2011 06:40 UTC

There’s a new flurry of commentary today on money-market funds: the Independent Directors Council has responded to the government’s report on the subject, as has Blackrock.

The problem which needs to be solved here is that money-market funds are in the business of maturity transformation: the funds are instantly available to investors in the funds, but they’re lent out for non-negligible periods of time. As David Merkel says, “financing illiquid assets with liquid liabilities is unstable, and begs for bankruptcy at the first significant loss of confidence.”

Merkel’s solution to the problem — requiring that liabilities match assets — is a simple one, and I like it a lot. If money-market funds promise investors their money back on demand, then they should only lend out money overnight.

How much downside would be associated with eradicating maturity transformation in this way? Not much, says Ashwin Parameswaran, who argues that “structural changes in the economy have drastically reduced and even possibly eliminated the need for society to promote and subsidise maturity transformation”.

I’m inclined to agree with him, since the downside of eliminating maturity transformation is higher interest rates, and a move towards equity and away from debt. Which would be very welcome, and make the economy as a whole much more robust.

This doesn’t mean, of course, that deposit insurance should be abolished. Deposit insurance does indeed act as means to promote maturity transformation, but it also acts to safeguard the savings of people with very little money, and encourage them to move their money out of the mattress and into the banking system.

But when people put their money in uninsured vehicles like money-market funds, they’re effectively trying to get interest rates associated with longer-term investments, on the order of a few weeks, while refusing to lock up their money for any time at all. If they want to make those longer-term investments, they should do so, rather than having their cake and eating it as they do right now.

Maturity transformation has, historically, been a helpful thing in terms of providing credit to grow the economy. But its time might have come and gone. At this point, there’s too much debt, not too little. And requiring assets to match liabilities would help move us back to a healthier state.

COMMENT

Felix would be happy to know that the largest money market firms are expecting their business to dwindle by at least half and perhaps as much as 75% in just a few years. They are all diversifing out into other areas of the investment business. In the current enviroment nearly all funds are being subsizied by their sponsors while they still offer returns near zero. The first quarter point increase in the overnight rate will not be passed on to money market mutal fund shareholders… at that point assets will begin to migrate in force.

Prior to the reserve fund breaking the buck funds had dozens of tricks to get securities that had maturities over a year into money market funds. They are mostly gone now.

The big issures of debt into money market funds (GE, GMAC, investment banks, commercial banks are all strongly incouraged to be constantly lowering their reliance on short term funding. The money market fund is not going to go completely away but it will continue to decline over time.

Posted by y2kurtus | Report as abusive

When hedge funds are too boring

Felix Salmon
Jan 11, 2011 19:12 UTC

Laurence Fletcher reports today on rich individuals with high risk appetites who are getting frustrated with modest hedge fund returns:

Many rich people were attracted to hedge funds by stories of George Soros’s $1 billion profit from his speculative attack on the Bank of England or John Paulson’s $3.7 billion earnings in 2007 betting on the subprime meltdown.

But institutions — who now account for over half of all hedge fund assets — often prefer lower-risk funds, targeting single-digit or low double-digit gains…

“There is certainly a pocket of family offices and high net worth individuals who are looking for more interesting returns, but from an asset-weighted standpoint, that is not where the industry is trending,” said Dan McNicholas, head of Asia financing sales at Merrill Lynch.

This makes conceptual sense to me. Once you’re rich enough that investment returns have no visible effect at all on your current or future standard of living, a large part of the attraction of hedge funds is the lottery-ticket aspect. If you strike it lucky, you could double or triple your money—or more. Meanwhile, institutions are naturally less interested in buying lottery tickets.

One obvious question here is to ask why, if investors want more risk, they don’t just get it themselves, by investing in hedge funds with borrowed money. If leverage within hedge funds is falling, then people who preferred life with 5X or 10X leverage can build it at home, by borrowing against their other assets and putting the proceeds in hedge funds.

There are two answers to that question. The first is if the leverage is external to the hedge funds rather than internal, then that raises the specter of investors losing substantially more than their original investment—something which isn’t possible if you invest in a highly leveraged fund. And the second is that while individual investors like the idea of leverage in theory, they don’t like engaging in such strategies personally. The way that hedge funds hide leverage in layers of opacity and obfuscation is quite attractive to investors who don’t want to blame themselves if their strategy ends up failing.

There are lots of high-risk venture capital funds out there, but they don’t tend to employ leverage, and they also tend to be very restricted when it comes to asset class. If you’re looking for bold bets in obscure markets, I can see how the professionalization and consolidation of the hedge fund world could be a disappointment to you. Maybe you’ll just have to make do with a $2 million investment in Facebook, at a $50 billion valuation.

COMMENT

y2kurtus and TFF:

Small investors have one other long-term advantage in the markets – we don’t have shareholders looking over our shoulder at quarterly returns. We truly have a lifetime portfolio and the only thing that matters is what happens over a 40-60 year investment period.

I am not investing in individual stocks (except an illiquid ESOP that the company puts shares into) but I can vary my portfolio over time to manage what I perceive as both short-term and very long-term risks.

Since I am not leveraged, I can ride out pretty much any financial crisis without needing to do panicked sales of assets. In November 2008, I was able to buy some things that I felt were mispriced (oil, TIPs & emerging markets come to mind) because I didn’t have to worry aboutmeeting margin calls. I can hold onto things without doing quarter and year end “window dressing.”

The primary reason that many professional results look so good over the past few years is because they got access to massive wads of federal money that allowed them to stay in business. It is likely that many of the professionals would have had to fold in 2008-2009 because of their leverage. Even folks like Paulson relied on getting money from institutions that were getting federal money or their bets may never have actually been converted into cash as their counter-parties failed.

Posted by ErnieD | Report as abusive

Art funds return

Felix Salmon
Jan 11, 2011 15:54 UTC

If proof were needed that the crisis is over and that we’re back to idiotic business-as-usual, then look no further than the fact that Dealbook—Heidi Moore, no less—is running a long story about art funds. These ludicrous creatures have strong claim to being the most ridiculous asset class in the world, no one should ever invest in them, and they invariably fail.

Heidi takes a disappointingly evenhanded “opinions on shape of earth differ” tone, presenting various art funds, and even the hilarious Art Exchange, with a perfectly straight face:

Proponents, like the art research firm Skate’s, are trying to legitimize the emerging movement by making the market more transparent and providing guidance to investors new to the art world…

By investing through funds, wealthy individuals can own art without paying the large fees and heavy taxes usually associated with full ownership. Some money managers claim returns can run as high 20 percent.

The field, with $300 million in assets, is small but growing. In Paris, the Art Exchange has plans to publicly list at least six pieces, including one by Sol LeWitt, and sell shares to investors. The Russian asset management firm Leader — controlled by close associates of Vladimir V. Putin’s — created two art-related investments. Last summer, Russia passed regulations to allow art to be turned into securities, the second country to do so after India. Noah Wealth Management and the Terry Art Fund are starting portfolios in China…

A handful of companies are trying to bring transparency to the historically shadowy, unregulated arena. Skate’s — founded by a Russian investment banker and entrepreneur, Sergey Skaterschikov — has set out to be “the Standard & Poor’s of art,” said its chairman, Michael Moriarty.

Most tellingly of all, the story comes with a highly-respectful portrait of Mr Skaterschikov by a NYT photographer. Heidi does gesture at reasons to be skeptical of this re-emergent market, but overall her piece is a ratification of the asset class, rather than the stern debunking it really deserves.

The first mini-boom in art funds came between 2005 and 2007; as Heidi notes, most of those funds have already cratered, less than five years after being founded. Anybody who invested in art funds last time around will have lost their money—and anybody who does so today will suffer the same fate. All art funds fail; the only question is when, rather than whether. I have never seen a single example given of an investor (as opposed to a principal) in such funds who has actually made money on his investment, and I don’t expect I will.

The silliest fund of all is the Art Exchange, which takes the concept of art-as-investment to its logical conclusion, and which is selling off shares in pieces by Sol LeWitt and Francesco Vezzoli at €10 apiece. It’s got to be the most stupid investment that anybody could ever make: the only way that it could ever be profitable is through the greater-fool theory.

Art is by its nature a negative-carry investment: you have to pay to store and insure it, but it pays no dividends and throws off no cashflow. As a result, the present value of a share of stock in, say, Sol LeWitt’s “Irregular Form” is equal to the amount it will eventually be sold for in the future, discounted by whatever discount rate you want to use. Except then there’s this, from the official Art Exchange brochure:

Simple exit conditions

In Art & Finance Service’s market, an artwork can only be removed from the marketplace once a single shareholder possesses all the shares.

This is essentially a guarantee that the artwork will never be sold. There are over 10,000 shares outstanding, and some of them will surely be bought on a lark by people tickled by the concept of owning 1/11,000th of a gouache. Trying to find those people and persuading them to sell their shares is far more trouble than it’s worth.* But since the piece will never be sold, the value of the shares, on any kind of DCF analysis, is clearly negative.

There is a case to be made that the wealth-management arms of big banks can and should have experts in the art market on staff. High net worth individuals often have a significant proportion of their net worth in art form, and that changes their risk profile. On top of that, they will occasionally want to borrow money against some or all of their collection. Their financial advisers should understand how the art market works and how much financial value there really is in the collection, over and above the pleasure that the collectors get from owning and viewing the work.

But if any adviser is asked about the wisdom of investing in an art fund, the answer should come clearly and swiftly: don’t even think about it. It’s all downside and no upside, and people who invest in such funds would always be better off just taking their money and buying an artwork they like instead.

*Update: Nicolai Hartvig reports that if an investor buys 80 percent of the shares, he or she can force the sale of the remaining 20 percent. But if an investor can buy 80% of a Sol LeWitt, they might as well just buy 100% of one outright, from a gallery.

COMMENT

I have been in the financial markets and the art business for 25 years. I have seen stock markets crash and art markets crash. The only difference between the two is that the Stock market is regulated and has a secondary market for liquidation. The Art market has No regulation, No secondary market and is an illiquid asset, which makes it very difficult to get your money back if the financial markets crash. Having said that, making the case for The Regulation of the Art Business/Market would be a good idea for everyone except for a handful of big auction houses, galleries, collectors, dealers, and museums. If a work of art can be valued and sold for $100,000,000.00 dollars (case in point: Giacometti’s “L’homme qui marche I” which sold for $104.4 million at Sotheby’s in February 2010 and Picasso’s “Nude, Green Leaves and Bust” which fetched a record $106.5 million at Christie’s in May), then that art product/financial instrument is a Commodity. Therefore art should be sold and regulated as a Commodity.

In fact, all Art Funds should be regulated with the (SEC) Securities Exchange Commission so that investors can see what art is being sold and who is selling it, who is buying the art and at what price. Full disclosure should be made also of the mysterious phone and Internet buyers, with whom an auction house can claim to be negotiating a private sale for an undisclosed amount. This type of Chandelier bidding and smoke and mirrors method of dealing should be illegal. By regulating Art as Stock, you would need a secondary Art Exchange to trade the original oil paintings, sculptures, silkscreen prints and giclées. This Art Exchange would bring more transparency to the art business and would regulate what is already manipulated by a handful of big collectors, dealers, museums auction houses, and galleries, even by some art critics who can influence and help decide to push a single artist to increase the “value” of a painting by 50-1000% in a single transaction. The collusion and back room deals that go on in this business are criminal by Wall Street standards.

The history of Art as Stock was originated back in 1994 by an American Artist, Robert Cenedella. Cenedella was the first artist to come up with the idea to sell Art as Stock – Stock as Art as laid out in “The Art of the Deal”, an article written in the New York Times Style Section, by Bryan Miller, on Sunday, March 20, 1994. Cenedella was calling then for regulating the art market. Here we are 20 years later and we are still trying to do the same thing but with more technology and transparency. The idea was 20 years ahead of its time. In the NYT’s article, Leo Castelli was quoted as saying that he compared the 1980′s art boom to junk bonds and that Cenedella’s idea was a “conceptual work of art” when it was really an investment in Art as Stock. Nobody really understood the concept then.

Cenedella’s idea made more sense already then than all the current ideas. The Regulation D Private Placement was registered with the (SEC) Securities Exchange Commission. The offering was 200 Shares of a Deluxe Limited Stock Edition. The concept was similar to an (IPO) Initial Public Offering. The company issued 200 shares of stock valued at $1,000.00 a piece for a total of $200,000.00. With each share of stock the buyers received a bank note certificate indicating part ownership in the oil painting as well as a large serigraph (a high quality silkscreen) of the original oil painting. This assured buyers full disclosure about what they were buying under SEC rules. The silkscreen picture “2001 A Stock Odyssey” was of the inside of the New York Stock Exchange. Each investor would share in the profit above the original cost of the painting priced at $50,000.00. So if the sale price should exceed $50,000.00 the profits would be distributed to the shareholders and the serigraphs would also go up in value. If you bought 100 shares you would own 50% of the original oil painting and 100 serigraphs, which the investor could also sell separately while still retaining ownership in the original oil painting. With each investment, buyers came away with a tangible piece of artwork, the silkscreen that they could hang on their wall.

This brings us back full circle and the question is does the art market continue business as usual or does Wall Street and the Art business both figure out how to regulate the investments in the art market so that there is full disclosure and transparency.

I can tell you right now that I would rather own a Picasso, a Thomas Hart Benton or a Cenedella than a share of Lehman Brothers, Bear Sterns or Enron. This may also one day be the same case for allot of the Contemporary Junk Art market.

The art market needs to be regulated because the way it is doing business now is just a crime.

Posted by NYC123 | Report as abusive

Algorithms vs retail investors

Felix Salmon
Jan 10, 2011 22:25 UTC

Anand Iyer, after reading the article I wrote in Wired with Jon Stokes, emails with a couple of questions:

The age of analysing a company’s stats, looking at its balance sheets, researching the market the company operates in, and looking at the people running the company seems to be gone. It’s all bots (highly sophisticated ones) who operate the financial world.

What I wanted to ask was would it make sense for a single person to be doing investing the good old fashioned way in this scenario (I do and I guess I will even if your answer tends to suggest in the negative, but I would be VERY interested in your answer).

Finally it would be very helpful if you were to recommend me some books on this algorithmic approach of investing and advise if it is indeed possible for one individual to do the very same thing.

My answer, I fear, won’t make Mr Iyer very happy.

Firstly, there are millions of individual investors doing diligent homework on companies and trying to invest intelligently in the stock market. When they finally arrive at a conclusion and the time comes to buy or sell, their collective decisions are known politely as “retail order flow,” and less politely as “dumb money”; high-frequency trading shops make lots of money by paying for the privilege of filling those orders and taking the opposite side of those trades.

It’s possible that one individual investor—Mr Iyer himself, perhaps—can beat the odds and make more money on his own than he would do simply investing in an index fund. If he does, then it might be due to luck, and it might be due to skill. But if I know nothing about Mr Iyer except for the fact that he’s a retail investor looking at corporate fundamentals, I wouldn’t give him much of a chance of beating the market. Fundamentals-based investing is (still) a very crowded trade, and most people who try it fail—they get picked off by faster, smarter, more sophisticated players in the market.

On the other hand, fundamentals-based investing is vastly more sensible than an individual investor even thinking about entering the shark-infested waters of high-frequency algorithmic trading. You can’t do it, don’t even try. If you do give it a go with real money, expect to lose all that money, very quickly.

The good news is that for the time being it’s not even possible for individual investors to enter this market: the barriers to entry are just too high. But if it ever does become possible, stay very far away. Unless you want to know what it feels like to lose years worth of savings in a matter of hours.

COMMENT

China already there:
http://pipelineandgasjournal.com/petrobr as-china-sign-10-billion-deal

Politics… it’s been fascinating watching the politics on this, and they may be opaque, but they are hugely covered. These is one of those cases where China is buying the assets of a continent. I did a foot-loose-retiree trip south in late ’09. In Buenos Aires you probably can’t go anywhere in the city and not see some form of PetroBras sign at least every 5 minutes; Soccer teams, bus stops, empanada stands, t-shirts on kids. And that’s in Argentina. In Brazil, it’s total.

Posted by ARJTurgot2 | Report as abusive

What will replace unions?

Felix Salmon
Jan 10, 2011 21:21 UTC

Jim Surowiecki has an excellent column this week on the declining influence, and increasing unpopularity, of labor unions:

The advantages that union workers enjoy when it comes to pay and benefits are nothing new, while the resentment about these things is. There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them, because of what economists call the “threat effect”: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers. These days, none of those things are true…

Labor may be caught in a vicious cycle, becoming progressively less influential and more unpopular. The Great Depression invigorated the modern American labor movement. The Great Recession has crippled it.

I can’t envisage unions ever getting their mojo back in the US private sector. At the same time, however, I can envisage a world in which the pendulum of power starts swinging back towards labor and away from capital. What I’m very unclear about is how that’s going to happen. Unions have lost their power, and Marxian rhetoric in general, about class or rent extraction or the balance of power between capital and labor, is treated with great suspicion by the broad mass of the population.

Meanwhile, of course, as Chrystia demonstrates, the people who control capital are willing and even eager to take money they would otherwise use employing middle-class Americans, and spend it on cheaper and equally productive workers abroad.

If the era of the union is over, as it seems to be, what other countervailing force will work to preserve the value of labor? Somehow I doubt that an epic shift to a new human age will manage to do the trick.

COMMENT

I’m so late to this thread that few will probably read this but my two cents on who will replace Labor unions in the fight vs capitol is AARP.

AARP is already fighting hard to defend social security which for the first time is a negative income stream for uncle Sam. Keeping that promise was easy when it meant billions coming in for congress to steal for other uses… during the recession it meant that briefly billions were going out as so many were unemployed and so many filed for early retirement benefits.

The number crunchers think that negative cash flow will temporarily reverse back to positive… but only for a couple years at most. Soon the outflows will exceed inflows permanently. Then each budget battle in congress will include a fight over social security and Medicare.

AARP will organize an army in the tens of millions to fight for the benefits they have been promised. There will be rallies, marches, town hall meetings, all of it. In the end I think they will succeed in keeping social security largely untouched… taxes will be raised on the affluent.

Medicare as it is currently structured is toast. My wife’s grandfather, a war hero, a 45 year contributor in the work force and a great guy all around was life-flighted 3 times (this at 77 and twice at 79 years old)from the rural hospital near his home to a major hospital. He probably spent 3 months in an ICU at what $2,500/day?

That math can never scale as the population of seniors skyrockets.

Preventive care will be covered, generic drugs covered,
but helicopter rides to the ICU for a 4 week stay that buy you another 4 months of a low quality life won’t last the fiscal reckoning that has already begun.

The old (retired, semi-retired and retired) will join hands with younger workers demanding that corporations and their affluent shareholders support those who have less.

Posted by y2kurtus | Report as abusive
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