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Financialization Is Only About Making Money From Money, Not The Real Economy Or Capitalism

Here are some articles written in the past 2 or 3 years about Financialization, which has been growing since the 1970s and has been endemic in the global economy since 2000.

When combined with fiat currency issued by private central banks (as currently seen with the Federal Reserve's QE-infinity bailouts, payouts etc.) it is a recipe for economic disaster and further weakens the overall Real Economy i.e. actual goods and services transacted along with price discovery function and valuation. It is so pervasive that our global economy can be no longer be considered a "free market" or "capitalism"

The financialization of banking, and of business in general, has hampered real growth and innovation while exacerbating inequality. It has disconnected actual product from value, and created vast bubbles in markets such as housing, insurance and credit. Buybacks by corporations of their own stocks have contributed to rigging of capital markets. Today the finance sector makes up only 7% of the economy and creates a mere 4% of all jobs, while generating 40% of corporate profits.
What is Wrong With This Picture?
What is Wrong With This Picture?


The Pitfalls of the 'Financialization' of American Business

Jun 28, 2016

According to Time magazine journalist Rana Foroohar's new book Makers and Takers: The Rise of Finance and the Fall of American Business, the 'financialization' of banking, and of business in general, has hampered real growth and innovation while exacerbating inequality. The result is an "upside-down" economy where finance, instead of serving as a catalyst, has become a headwind. And in the wake of a devastating financial crisis fueled by excessive debt and credit, we are seeing a smoke-and-mirrors recovery driven largely by more of the same.

In the following book review, Knowledge@Wharton summarizes Foroohar's argument and shares examples from the book.

There's a scene in the movie "The Big Short" where a hedge fund manager, played by Steve Carrell, finally begins to grasp the flimsy house of financial cards that would soon collapse and lead to the sub-prime mortgage crisis, and in turn a full-blown banking crisis and global recession. He listens with growing exasperation as a manager of CDOs, collateralized debt obligations, explains how he has packaged and repackaged mortgage debt into increasingly complicated and exotic securities. The tipping point is when he realizes that the market of speculative bets on mortgage bonds is worth 20 times the value of the mortgages themselves.

That outsized relationship of speculation to concrete assets, of abstracted finance to real world business, is at the heart of Rana Foroohar's urgently argued new book Makers and Takers: The Rise of Finance and the Fall of American Business. Where finance and banking were once the servants of the larger economy, pooling deposits and directing them to productive investment, they have now become the master. The "financialization" of banking, and of business in general, has hampered real growth and innovation while exacerbating inequality. The result is an "upside-down" economy where finance, instead of serving as a catalyst, has become a headwind. And in the wake of a devastating financial crisis fueled by excessive debt and credit, we are seeing a smoke-and-mirrors recovery driven largely by more of the same.

Casino Finance

In distinct yet eerily similar ways, the collapses of 1929 and 2008 were both set in motion by speculative finance. The stock market crash of 1929, and the Great Depression that followed, ushered in a wave of reform in finance and banking, including the creation of the FDIC and the SEC. Four provisions of the Banking Act of 1933, collectively known as Glass-Steagall, were designed to erect a wall between commercial and investment banking, between banking and commerce — a separation that became a core principle of banking for the next few decades. But evolution within the industry, and in regulatory oversight, slowly chipped away at that wall, and Citibank was at the center of that history.

The 'financialization' of banking, and of business in general, has hampered real growth and innovation while exacerbating inequality.

Citibank was founded in 1812 as City Bank of New York and became National City Bank in 1863, the year the National Banking Act was passed. After World War II, under the stewardship of Walter Wriston, the bank began expanding into new areas, and pushed back against constraints like Regulation Q, a provision of Glass-Steagall limiting the interest rates banks could offer. A key turning point was the introduction of the certificate of deposit (CD) in the early 1960s, an innovation Foroohar describes as an "ingenious way around the Glass-Stegall rules." With the creation of CDs, and soon after of a secondary market for them, Wriston blurred the line between lending and trading, a game changer for postwar banking. "Banking was no longer a utility. Just as Wriston had hoped, it was increasingly a high-speed, high-stakes business."

Wriston changed the bank's name to Citibank in 1976, and it was during this decade that the industry searched in earnest for more and more high-yield products. Banks began experimenting with derivatives, and with packaging mortgages into securities. Meanwhile, regulatory oversight back-pedaled, and was ultimately rewritten. President Jimmy Carter deregulated bank interest rates in 1980, effectively wiping out Regulation Q. John S. Reed took over the bank as CEO in 1984, and "championed a new wave of high-tech finance," the author writes. In 1998, Reed engineered a merger with Travelers Group, an insurance and investment firm. The newly christened entity, Citigroup, became the world's largest financial institution, changing the financial services landscape overnight.

Glass-Steagall would be formally repealed in late 1999. But in Foroohar's view, it was the merger — and Citi's aggressive expansion into "pretty much every financial service ever invented" — that "dealt the final blow to the dividing wall between commercial and investment banking." It was also the birth of 'Too Big To Fail,' and so it was no surprise, the author says, that Citi was at the "epicenter" of the 2008 crisis. Yet she argues that finance and banking had long since moved off its "moorings" in the real economy, a development Nobel Prize-winning economist James Tobin worried about as early as 1984. He lamented a growing "casino aspect to our financial markets," and expressed unease that "we are throwing more and more of our resources, including the cream of our youth, into financial activities removed from the production of goods and services."

Today, finance, while making up only 7% of the economy and creating a mere 4% of all jobs, generates more than a fourth of corporate profits — up from 10% 25 years ago.

'Whiz Kids' and Bean Counters

Parallel to the ascendance of finance, Foroohar contends, was a decline in American business as large corporations increasingly came to mimic the banks that were supposed to serve them and to seek profits in 'financial engineering' activities divorced from their core services and goods.

An unexpected villain in this story is Robert McNamara, best known for his later tenure as secretary of defense under John F. Kennedy and Lyndon B. Johnson. Critics of his role as one of the architects of the Vietnam War would point to his obsession with systems analysis — a preoccupation he developed in the Air Force's Office of Statistical Control during World War II, and then brought to bear on American industry.

In the Air Force, McNamara and a group of like-minded peers became known as the 'Whiz Kids' for their ability to crunch numbers and find operational efficiencies. Almost immediately after the war, all 10 of them became executives at the Ford Motor Co., recruited and hired by Henry Ford II himself. The company was losing money and market share, and was certainly in need of an overhaul. "Where finance had once been nearly nonexistent within Ford," the author writes, "it quickly became the control hub of the firm." The 'Whiz Kids' and young MBAs wrested control from the 'car guys' in engineering and design.

For a while, McNamara's "management by numbers" worked. The company was quickly in the black, and in prime position to ride the transportation boom of the 50s. Yet over the long run, argue Foroohar and others, the new mindset had disastrous consequences, and was part of a larger shift in American industry from tradesmen to accountants. "The 'Whiz Kids' were the forerunner of the new class in American business," David Halberstam wrote in his book The Reckoning. "Their knowledge was not concrete, about a product, but abstract, about systems."

Eventually, this disconnect from core product and value came back to haunt Ford and other companies driven by finance. A famous Harvard Business Review article from 1980, "Managing Our Way to Economic Decline," dates falling investment in research and development back to the mid-1960s. Increasingly, the authors found, U.S. companies focused on "sophisticated and exotic" management of their growing cash reserves, grew preoccupied with cost-cutting measures, and treated "technological matters simply as if they were adjuncts to finance or marketing decisions."

McNamara became president of Ford in 1960, and some of the 'Whiz Kids' stayed at the company into the 1980s. Others moved on to high positions at other companies, where the bottom-line approach began to take its toll. After two Ford alumni took over Xerox in the late 1960s, tightening budgets and cutting back on R&D, the once innovative and dominant company "went into permanent decline, losing more than half its market share and selling off assets piece by piece." The author cites Hewlett-Packard as a more recent example of a "culture of innovation destroyed by bean counters."

The Ford approach has at times blown up in its face, quite literally. Its low-cost subcompact car the Pinto, introduced in 1970, soon became a nightmare when it was found to burst into flames during rear-end collisions — costing the company millions in payouts and lost market share. According to Foroohar and writer Andrea Gabor, that disaster "could be traced directly back to the cost-benefit analyses established by the 'Whiz Kids.'"

Ford's competitor General Motors recently went through its own safety disaster when a faulty ignition switch in two models resulted in at least 124 deaths and cost the company well over a billion dollars in penalties and lawsuits. An exhaustive inquiry into the problem didn't blame cost-cutting per se. But it did point to the prevalence of corporate silos at GM: departments and divisions that become isolated and protective, undermining communication and accountability. And in the view of the Foroohar and former GM vice chairman Bob Lutz, author of Car Guys vs. Bean Counters, putting finance in charge "leads inexorably to corporate silos." Accountants love silo structures that allow them to micro-manage expenses. "It's all part of the financial control mentality," says Lutz.

MBAs: Studying Markets, Not Companies

Two related developments have fed into the financialization of American business. One is the growing influence of MBAs, and the changing nature of the education they receive. The 'Whiz Kids'' love of systems analysis had its academic correlate in the University of Chicago. Perhaps not coincidentally, Foroohar notes, Milton Friedman, a star proponent of the "markets know best" argument, was exposed to McNamara-style systems analysis at Columbia's Navy-sponsored Statistical Research Group during the war. With help from the Ford Foundation (which had a huge hand in shaping postwar business education), Chicago attracted Friedman and a cadre of star economists.

The "Chicago school," as it came to be known, placed great value on highly theoretical models. It was enormously influential in political circles, helping to spur the movement to deregulate in the 70s and 80s; and it also helped inform business education more broadly. The result, Foroohar writes, "was a very finance-driven approach to business education, in which the central questions were no longer about companies, but markets."

Large corporations increasingly came to mimic the banks that were supposed to serve them and to seek profits in 'financial engineering.'

Critics of this approach contend it was guilty of falsely emulating the physical sciences, and aren't surprised that in recent years these models seem to have fallen flat in real-world situations. Emanuel Derman is a mathematician and physicist at Columbia who believes mathematics holds too much sway in both economics and business. "Models of all kinds," he says, "have been behaving very badly. To confuse a model with the world of humans is a form of idolatry — and dangerous."

Yet MBAs continue to dominate the business world; and as executive and Wall Street compensation has soared, finance commands a disproportionate hold on the best young minds at the best universities. "A full quarter of American graduate students earn a master's degree in business, more than the combined share ... in the legal, health, and computer science fields," the author writes. This misallocation of talent, she says, has real consequences for our ability to generate real growth and innovation.

In spite of that dominance, industries with fewer MBAs and less finance tend to be more successful. Silicon Valley, for example, is "light on MBAs and heavy on engineers." And a 2015 comparative international study found out that productivity "declines in markets with rapidly expanding financial sectors."

The Cannibalized Company

The Chicago school helped establish the ideological basis for a wave of "shareholder activism" that would further push American business toward an obsession with the short-term bottom line, at the expense of long-term investment in growth and innovation. The purpose of the corporation, Milton Friedman and others asserted, was to maximize financial value. And the Efficient Market Hypothesis (credited to Friedman disciple Eugene Fama) holds that stock prices are the best measure of a company's value.

Accordingly, maximizing stock prices was increasingly elevated as a cardinal virtue. In 1990, the Business Roundtable (a group of CEOs from America's largest companies) defined management's responsibility as that of serving a broad range of stakeholders, including but not limited to stockholders. Just seven years later, the wording had changed. Management's "paramount duty" was to stockholders — the interests of other stakeholders relevant only "as a derivative" to that primary loyalty.

Armed with this ideology, powerful shareholders like Carl Icahn pressured companies to pass on more and more of their earnings to those who owned stock in the company — in the form of higher dividends, and increasingly, stock buybacks. In 1982, the SEC loosened regulations limiting a company's ability to repurchase its own stock, despite protests by some dissenters that this would essentially legalize market manipulation. And this, Foroohar and others argue, is exactly what happened.

This disconnect from core product and value came back to haunt Ford and other companies driven by finance.

Reducing the number of outstanding shares on the market artificially inflates a key measure of a company's value: its earnings-per-share, or EPS. Buybacks are often followed by an immediate surge in stock price, at least in the short term. The concern is that prominent owners of a stock will lobby for buybacks and then sell off that same stock, reaping a healthy profit even though there has been no change in a company's underlying value. Icahn was recently charged with such a "pump and dump" strategy when, after successfully lobbying Apple to engage in a series of costly repurchases, he sold his entire stake in the company.

The buyback boom began in the 1980s, and has only accelerated since. In the last decade, the author writes, "American firms have spent a stunning $7 trillion buying back their own stock — the equivalent of half their profits." In the last two years, buybacks and dividends have actually exceeded the net earnings of publicly traded American companies. Adding insult to injury, companies like Apple often fund these buybacks, not by dipping into their substantial cash reserves, but by borrowing. In 2013, despite having $145 billion in the bank, Apple borrowed $17 billion. It was able to do so at favorable rates, and to save on taxes it would have owed if it had tapped into its many tax-sheltered offshore accounts. Meanwhile, the company's R&D as a percentage of sales, in decline since 2001, dipped even lower.

Complicating matters further, Foroohar and others point out, is the fact that stock options account for a huge chunk of executive compensation — creating a built-in incentive to engage in financial maneuvering that lifts stock prices but doesn't create real value. This has eroded American competitiveness, a Brookings Institute paper worries, by replacing a "retain-and-reinvest" corporate model with a "downsize-and-distribute" one. The end result, the author of the paper writes, is "profits without prosperity" as business focuses on "value extraction" instead of "value creation."

"We're All Bankers Now"

In a key chapter on how financial maneuvering and an obsession with short-term profits have undermined innovation and the building of long-term value, Foroohar uses the evolution (or devolution) of General Electric as a striking case in point. There is good reason to do so: As the only U.S. company that has remained in the Dow Jones Industrial Average for the index's entire 120-year history, GE is both a mainstay and a "bellwether" for American business. Yet during much-heralded CEO Jack Welch's watch, she says, the company went from a focus on "making things" to "moving money around."

Known for innovation in a wide array of products — from jet turbines to X-ray machines — GE's earnings had tripled over the 1970s, but the growth of its stock price was less impressive. When Welch took over the company in 1981, he quickly set about changing that. He engaged in an aggressive campaign of acquisitions and cost-cutting, both of which boosted its share price. Finance moved front and center. Divisions focused on consumer credit and lending doubled in size, while manufacturing stagnated. Yet even while slashing jobs (earning him the nickname "Neutron Jack") and investment in R&D, he funded his acquisitions and financial operations with unprecedented levels of corporate debt.

At the center of all this "financial wizardry" was GE Capital, the company's financial services firm. At its peak, it accounted for over half of GE's profits, and its total assets swelled from $371 billion in 2001 to nearly $700 billion in 2008 when the financial crisis hit. By that time, GE had become a kind of closet bank, and as such had become part of 'Too Big To Fail.' When it too was caught up in the collapse of the real estate market, it received a bail-out in the form of $139 billion in guaranteed loans from the FDIC.

The story of GE Capital, Foroohar says, is representative of a larger trend in American business. At countless other classic companies such as Sears and Ford, stand-alone lending units originally established to help individual consumers finance purchases of a company's core products became "financial behemoths that overshadowed the manufacturing or retailing activities of the parent firm," writes Greta Krippner in Capitalizing on Crisis: The Political Origins of the Rise of Finance. Automakers generate a substantial portion of revenue from consumer loans, and airlines sometimes make more money hedging on oil prices than by selling seats.

"My gut told me that compared to the industrial operations," Welch wrote in his autobiography, the financial operations of GE Capital "seemed an easy way to make money. You didn't have to invest heavily in R&D, build factories, and bend metal day after day." Although the decline in America's manufacturing base is sometimes seen as inevitable, Foroohar says the country neglects that sector at its peril. Manufacturing may account for only 9% of employment, yet it represents 69% of private-sector R&D and contributes 30% of the nation's productivity growth.

"Re-Mooring" Finance in the Real Economy

Later chapters of Makers and Takers detail other corrosive effects of the financialization of American business. Even as financial operations have swallowed up traditional manufacturing, deregulation has allowed financial giants like Goldman Sachs and Morgan Stanley to expand into nonfinancial sectors of the economy. The two firms now have significant infrastructure holdings in agriculture and industrial metals — all while trading commodities futures in those same markets. In recent years, both have been charged with hoarding and fined millions of dollars for market manipulation. Critics contend that this latest blurring of the lines between banking and commerce has introduced dangerous volatility into commodities prices.

The economic recovery, the author says, is uneven and two-tiered as a growing share of the housing market is gobbled up by private investment firms. Our retirement system has been "hijacked" by finance, creating a patchwork of plans with high fees and high, if hidden, risks. Overseas tax shelters and other loopholes undermine the tax base and create incentives for unproductive investment. Meanwhile, a revolving door between Washington and Wall Street threatens to undercut and roll back Dodd-Frank and other reforms.

In a closing chapter, Foroohar puts forth broad principles for "How to Put Finance Back in Service to Business and Society." Along the way, she finds some hopeful signs that the pendulum of financialization may be ready to swing back. Last year, for example, General Electric announced it was spinning off GE Capital and getting out of the business of banking. It has launched a "growth board" (a sort of internal venture capital firm) and upped its spending on R&D. And in a return to its roots, the company's Schenectady campus is, after decades of downsizing, the focus of new investments in renewable energy and a high-tech battery plant, and "is once again a growing R&D hub for the company."


 link to www.industryweek.com

Industryweek 14053 Equity1 The Economy Competitiveness

The Financialization of the Economy Hurts Manufacturing

How reining in Wall Street excess can strengthen U.S. manufacturing and reduce income inequality.

Michael Collins
Sep 25, 2015

Free-market capitalism says that the only purpose of business is to create shareholder value and that the unfettered market can regulate itself. In the last 30 years, that definition changed to, "the only purpose of business is to create shareholder value measured by short-term results and with little or no regulation."

This is no longer the capitalism described by Adam Smith; it is financialization -- defined as the "growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns."

In recent years, as New Deal regulations were slowly dismantled, financial sector growth accelerated along with high risk-taking and speculation. The employment and total sales of the finance industry grew from 10% of GDP in 1970 to 20% by 2010. The focus of the economy was no longer on making things; it was on making money from paper. The finance industry swelled as the rest of the economy weakened.

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The disproportionate growth of finance diverted income from labor to capital. Wall Street profits rose from less then 10% in 1982 to 40% of all corporate profits by 2003.

One of the big problems caused by finance rising and manufacturing sinking is that a low-employment industry replaced a high-employment industry. At its peak, in the mid-twentieth century, manufacturing generated 40% of all profits and created 20% of the nation's job. Today finance controls 40% of the nation's profits with 5% of the jobs.

This tremendous growth has led to a tremendous increase in economic and political power. This power and the fact that Wall Street is the banker of most public corporations has given them control over major sectors of the economy, especially manufacturing. In the past, Wall Street was comprised of banks that financed manufacturing's capital investment and R&D, which made America great.

However, after deregulation, Wall Street became the masters of manufacturing, demanding short-term profits rather than funding the strategies that led to long-term growth. Wall Street's demand for short-term profits forced most manufacturers to slim down their organizations and eliminate the functions that did not show a quick ROI.

Financialization is only about making money from money; it has nothing to do with creating jobs or shared prosperity and, as a result, it has had a devastating effect on manufacturing. In his article, "Wall Street's Police State," Les Leopold says, "financial corporate raiders swooped in to suck the cash flow out of healthy manufacturing facilities. Wall Street, freed from its New Deal Shackles, loaded companies up with debt, cut R&D, raided pension funds, slashed wages and benefits, and decimated good paying jobs in the U.S. while shipping many abroad."

The lobbyists for the financial industry were able to remove all of the laws and regulations created during the New Deal. This allowed Wall Street to use many new quick-buck methods such as derivatives to make money from money and have all of their gambling protected by American taxpayers. Allowing finance to gamble with depositor's money was a terrible decision that led to the crash of 2008 and will lead to another crash in the future unless they can be stopped.

Today finance controls 40% of the nation's profits with 5% of the jobs.

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In an article in the Boston Review, Susan Berger a professor at MIT makes the assertion that, "Since the 1980s, financial market pressures have driven companies to hive off activities that sustained manufacturing." She refers to the example of the Timken Company, which was forced to split into two companies (Timken Co., IW500/299 and TimkenSteel, IW500/442) by the board of directors. The chairman argued that the company should stay together because that is how it had been able to offer high-quality products with good service support. The board overruled him based on the potential of better short-term profits.

This stripping down of companies to their core competencies has been forced on most of the large publicly held corporations to some degree. But in stripping them down, many critical functions have been lost. For example, apprentice-type training has been lost in many American corporations because it is long-term training and doesn't have a good enough short-term ROI. Basic research, funding to bring innovation to scale, and diffusion of new technologies to suppliers, have also been dropped or reduced, because they are seen by the shareholders as being peripheral to the core competencies.

If innovation is the critical strategy that will keep America in the race and its position as global leader, how can it happen without long-term financial support?

The growth of financialization also begs another important question. If innovation is the critical strategy that will keep America in the race and its position as global leader, how can it happen without long-term financial support? This is a very strategic question because most innovation comes from the R&D and new technologies created by manufacturers.

Wall Street has the upper hand and continues to focus on short-term profits, rather than investing in manufacturing and the country's infrastructure. It is hard to see how American manufacturing will be able to compete with the rest of the world like we did in the twentieth century.

William Levinson summarizes the problem in his article in Industry Week: "The disease killing America's economic health is financial planning, and one of the symptoms is the loss of the U.S. manufacturing base. Industry is the foundation of military as well as economic power, so the transferring of American manufacturing capability to China is extremely dangerous."

If we are going to have a chance at reversing the decline of manufacturing or developing a strategy of innovation that will keep the U.S. competitive, the current direction of the financial industry must be changed. In its pursuit of short-term profits, they are jeopardizing the long-term health of the economy and the manufacturing sector.

As an industry, finance does not deserve the trust of the American people. Consider just some of their more recent scandals:

Private equity and corporate raiding: Corporate raiders contributed to inequality as they dismembered firms, laid off workers, auctioned off the assets and destroyed entire communities to reap huge rewards for few stakeholders.

• The corporate raider approach to making huge returns in a short-period of time was very popular with the wealthy and was viewed as necessary part of free-market capitalism (the elimination of the weak). However, some economists believe that every point gained in financialization leads to deeper inequality, slower growth and higher unemployment.
• Credit: As regulations slowly collapsed along with oversight of consumer and mortgage lending, Wall Street introduced predatory lending in the form of high-interest-rate credit cards with fees and penalties, payday loans and subprime mortgages. The predatory lending practices "preyed on the poor and made them poorer."
• Housing bubble: Big finance bundled bad mortgages and packaged them as toxic securities to be sold all over the world. The bubble bursting forced the economy off the cliff and into the great recession, but nobody went to jail, the shareholders paid the government fines and the taxpayers were forced to bail them out.
• Public Infrastructure: Another problem created by financialization is that there is less money available for government investment in the real economy. One study suggests we need $3.6 trillion to finance the repair or replacement of highways, bridges, sewer, water, and electrical transmission systems.

Can Financialization be Sustained?

I don't think so.

Outside of the finance industry, the average worker has not been doing very well. The share of income going to the average worker has been shrinking steadily for the past 30 years, as shown in the chart below.

The problem is in aggregate demand. Although the actions of Wall Street have made the rich richer, it has done little for the average worker. This is a problem because 70% of the economy is based on consumption, and people are not consuming enough to grow the economy. Some of the people in the top 5% of earners are beginning to realize this, and even Wall Street is beginning to examine the problem.

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Top income earners have benefited from wealth increases but middle- and low-income consumers continue to face structural liquidity constraints and unimpressive wage growth. "

— Morgan Stanley report, "Inequality and Consumption"

Morgan Stanley in a report "Inequality and Consumption," said, "So, despite the roughly $25 trillion increase in wealth since the recovery from the financial crisis began, consumer spending remains anemic. Top income earners have benefited from wealth increases but middle- and low-income consumers continue to face structural liquidity constraints and unimpressive wage growth. To lift all boats, further increases in residential wealth and accelerating wage growth are needed."

It is no coincidence that the rise of financialization happened during the decline of manufacturing, middle-class income, capital investment, investment in infrastructure, and the rise of inequality.

The following graph also shows that the total employment in manufacturing grew until 1979, but has been declining steadily since this peak--and declining precipitously since year 2000. Since 1979 manufacturing has lost 8 million jobs.

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It is also no coincidence that during the same period there was an enormous shift in wealth to the top 20% earners at the expense of the bottom 80%.

Perhaps the financial industry is an example of free-market capitalism at its best. But its lust for short-term profits has the power to hurt the economy and destroy the manufacturing sector.

Perhaps the financial industry is an example of free-market capitalism at its best. But its lust for short-term profits has the power to hurt the economy and destroy the manufacturing sector. It is said that these types of capitalists who continually push the legal boundaries would sell you the rope at their own hanging. The one thing that they have proved over the last 4 decades is that they must be strictly regulated. I am convinced that left to their own devices, they will cause another financial crash of the economy.

The Dodd-Frank legislation is simply not enough to stop the finance industry from repeating its past crimes, and many banks are still too big to fail. At a minimum, we need to bring back the Glass-Steagel Act that separates the standard banking and investing parts of the bank from the risky instruments like credit default swaps and derivatives, which should not be protected by the FDIC.

Wall Street controls most of the money for capital investment, technology development, and the expansion of manufacturing. The focus now is on short-term investment and making money from money, not in long-term investments that would grow the manufacturing sector. If Wall Street is well regulated and the tools used in financial engineering made illegal, manufacturing might have a chance of getting its share of the money.

Wall Street Disease and Financialization of Everything 23.Apr.2020 05:44



Apple and many other tech giants have Wall Street disease

Left untreated, they could share the fate of General Electric or Lucent

Marshall Auerback
November 10, 2018 7:00PM (UTC)

November 10, 2018 7:00PM (UTC)

This article was produced by the Independent Media Institute

The boom witnessed in the U.S. equity market over the past few years has begun to echo the latter stages of the high tech bubble of the early 2000s, right down to the investor interest ultimately gravitating toward five stocks that have posted substantial gains, and obtained an almost cult-like status among their respective devotees. In 2002, it was Lucent, Cisco, Microsoft, Dell, and Intel. Today, it's Facebook, Apple, Amazon, Netflix, and Google. They've even got an acronym among their followers: FAANG. Taken in aggregate, these five stocks account for approximately one-quarter of the NASDAQ's total market capitalization. In fact, just three months ago, Apple alone became the first publicly traded U.S. company to reach a $1 trillion market capitalization. But just as the Big 5 of the last high tech boom ultimately came unstuck, so too, one by one, today's tech titans are gradually being "de-FAANG-ed," as investors have come to reassess their growth prospects on the grounds of anti-competitive/anti-trust considerations,abuse of privacy, and deteriorating top-line growth. Apple is the most recent example, but it tells a much bigger tale, which speaks to a longstanding disease infecting the overall U.S. economy: namely, financialization.

"Financialization" — which denotes "the increasing importance of financial markets, institutions and motives in the world economy" — manifests itself clearly in the case of Apple. It is becoming another example of an American company that is increasingly valuing financial engineering over real engineering, as its core businesses get hollowed out amid product saturation and declining global sales.

Like General Electric some 25 years under Jack Welch, Apple under current CEO Tim Cook increasingly represents a microcosm of the changing role of U.S. markets as they have become less a vehicle for capital provision, more akin to a wealth recycling machine in which cash piles are used less for investment/research and development, more for share buybacks (which are tied to executive compensation, elevating the incentive for, at a minimum, quarterly short-termism and, at worst, fraud and corporate looting). All in the interests of that flawed concept of "maximizing shareholder value," in which the company's stock price, rather than its product line, drives corporate decisions, determines senior management compensation, and becomes the ultimate measuring stick of success.

Usually, when this trend becomes ascendant, it doesn't end well. Perhaps the adverse reaction to Apple's recently reported earnings is the first warning of what could follow.

To be sure, this is not the first rough patch for Apple since its resurrection under Steve Jobs when he returned to the company in 1997. In the early 2000s, the company came under scrutiny for the manner in which it improperly backdated stock optionsand didn't report this to the SEC. As a result, Apple was found to be systematically understating its profits and defrauding its shareholders (stock options were classified as "non-expense expense," which allowed them to be omitted from the profit and loss account, thereby artificially bolstering reported earnings). Having already obtained iconic status in Silicon Valley, then-CEO Steve Jobs got off lightly. Likewise when Jobs was directly implicated in a wage-fixing cartel with Google, among others. More recently, Apple's aggressive tax avoidance strategies have come under scrutiny.

The backlash has hitherto been comparatively muted, however, because many of the foregoing practices came at a time when Apple was producing one hit product after another, inspiring a cult-like devotion among consumers, and generating investor enthusiasm on Wall Street. Unfortunately for the iPhone manufacturer today, the "hit parade" of new, earth-shattering products appears to have dried up, and the global market is increasingly being saturated with comparable products, creating prices pressures and declining market share.

Apple is increasingly deploying its substantial cash pile, not for investment/innovation, but for share buybacks (which refers to the repurchasing of shares of stock by the company that issued them). Buying back shares helps to support the share price both by reducing overall supply and also by inducing "herding behavior" by institutions, encouraged by the vote of confidence conferred by management insiders (who presumably understand the company's prospects better than most). Additionally, by reducing the number of shares outstanding, this practice is accretive to earnings per share, which helps dress up the financial statements further. As a "growth stock," Apple's investors generally evince a preference for earning momentum, as opposed to a heavy stream of dividend payments (which is generally preferred by "income"-oriented investors).

For all of the theoretical reasons why share buybacks are supposedly a good thing, the dirty little secret is that the real reason for them is that they help to enrich senior management directly, because their compensation (via extensive grants of stock options) is increasingly tied less to the performance of the company, more to the company's share price. Like so many other major listed companies, Apple has been starting to embrace this trend with more gusto. As Eric Reguly of the Globe and Mail wrote earlier this year: "In May, Apple announced that it would vacuum up another $100 billion of its own stock, taking the total buyback since the end of the Jobs era to roughly $300 billion."

To be fair to Apple, it is hardly unique. As early as 2010, market analyst Rob Parenteau noted that company managements, "ostensibly under the guise of maximizing shareholder value, would much rather pay themselves handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment." Likewise, Professor William Lazonick noted in his work, "Profits Without Prosperity," that the 449 companies that were publicly listed between 2003 and 2012 "used 54% of their earnings — a total of $2.4 trillion — to buy back their own stock, almost all through purchases on the open market."

Share buybacks were effectively illegal under SEC rules until 1982, in the midst of the Reagan deregulation wave, when SEC Rule 10b-18 was introduced. Until that time, buybacks had been considered a form of stock manipulation. As early as the mid-1980s, more and more companies have resorted to them, and the practice has grown exponentially.

But as the title of Lazonick's paper makes clear, the buybacks created a lot of prosperity for the corporate executives and shareholders, but did little for the underlying profitability for the companies themselves, largely because cash piles were diverted away from productive uses such as R&D and capital investment. "Maximizing shareholder value" provides a fancy and bogus rationale for blatant stock manipulation, this time tied to executive compensation. The arguments for the tight restriction of buybacks pre-1982 are, if anything, even stronger today, given the scale and the corresponding degradation of corporate balance sheets as a consequence of the practice. Like the pigs at the trough making one last grab for cash before the bubble finally bursts, it creates enormous incentives for "control fraud."

Apple has not fully crossed over to the dark side, but it is probably more than coincidental that their share buybacks have accelerated just as their explosive rate of growth appears to have stalled. Wall Street analysts seldom give outright sell recommendations on hitherto beloved stocks (the corollary also applies, which can amplify booms and busts). But there was enough in the last Apple earnings result to provide some cause for concern.

This presents a classic chicken and egg problem: Is Apple now using its cash to buy back stock because it is failing to produce new earth-shattering products like the iPhone or iPod (or, earlier, the Macbook), or is it the case that a lack of innovation a direct outgrowth of deploying the cash largely to buy back stock?

Either way, there is no exciting new epoch-changing product in the pipeline that would drive unit sales. The new Apple Watch certainly hasn't been a game-changer. And, as Reguly argues, "Every dollar devoted to buybacks is a dollar not devoted to uses such as research and development, employee training, acquisitions and community giving."

Tellingly, what Apple isn't going to do in the future hints at bigger problems ahead. In addition to projecting weaker-than-expected holiday sales, the company surprised investors when it indicated that the company would no longer break out how many iPhones it sold each quarter. The obvious conclusion to be drawn is that is because Apple will soon have to rely on price, not volume of unit sales, to keep the show going. Which likely means more stock buybacks to support the share price.

Unfortunately, that's not a particularly healthy scenario, coming at a time when smartphone sales are coming under pressure globally, which is being reflected in major product price cuts across the entire industry. Consider Samsung's Galaxy S8, which can be purchased on Amazon.com for anywhere from 30 to 50 percent below the original launch price (depending on phone company). That's significant because Apple has been losing global market share to companies like Samsung for something like five years now. And if Samsung is experiencing these kinds of pressures, then Apple's strategy of trying to offset the loss of market share by raising prices (or resorting to tricks in which Apple uses software updates to intentionally slow down the iPhone and deliberately impair the battery life) is likely to prove problematic.

Much like Microsoft after its first phase of growth, Apple is morphing into a slower-growing cash cow. It's hard to sustain a $1 trillion market cap under those operating conditions. Increased functionality in a smartphone can only go so far; there are only so many ways to improve taking a selfie or enhancing facial recognition for security protocols. And those kinds of marginal improvements are likely insufficient to create a huge new wave of global sales. The smartphone has evolved considerably over the past decade, but at this stage of its product development, the incremental improvements are marginal. So the cash pile will continue to go toward buybacks, an increasingly destructive strategy during a time of falling markets and declining sales, when the cash should be husbanded as a defensive measure, not dissipated and replaced with debt.

Apple is neither the first nor the last company to find itself in this position. Slowing product growth and the inexorable pull of untold wealth that could be derived from a stock market bubble is a deadly combination that has infected companies well beyond the hitherto beloved creation of Steve Jobs. The misallocation of capital via share buybacks (at a cost of sacrificing innovation, research and development) is yet another example of the fantasy of efficient financial markets and the notion that markets are always the optimal means of intelligently allocating capital. We see the development of a bogus theory of "maximizing shareholder value" used increasingly to mask blatant stock manipulation. The practice appears particularly perverse when one sees companies' core businesses dissipate against a backdrop of balance sheet deterioration (as the cash is replaced with debt). As financialization increasingly hollows out Apple's core, it provides a broader symptom of everything that is wrong with America's bubble-ized capitalism today.


 link to www.industryweek.com

Industryweek 31898 Gold Dollar Sign 1540 0

The Economy

How Financialization Is Starving Manufacturing

The shift in the economy that began during the Reagan era is all about short-term strategies to make fast profits.

Michael Collins
Sep 21, 2018

The news seems to be full of praise for our strong economy. Columnists continuously cite the low 3.9% unemployment rate and GDP growth as the best in many years. Citizens know that there has been a huge redistribution of income to the 1% and the shareholders of corporations and that their wages have been stagnant or declining for many decades. They also remember the economic meltdown in 2007 caused by the big banks and are distrustful of corporations and what they might do to the economy.

Economic analyst Rana Foroohar makes the case that the U.S. system of market capitalism itself is broken. She says that the finance sector of the economy, which includes banking, insurance, real estate, hedge funds and mutual funds, used to be the servant of business, in which they took individual and corporate savings and funneled the money into productive enterprises.

Foroohar thinks that has changed, and finance is now the master who is dictating to corporations and to the economy.

This change in free-market capitalism is also called financialization. Financialization is a way to make money from money rather than from goods and services. Financialization emphasizes short-term profits and cost reduction rather than long-term investment.

The big change in capitalism that led to financialization actually began during the Reagan administration—and with the influence of the economist Milton Friedman, who argued that a corporation's only responsibility was to increase profits to shareholders.

The free-market capitalists saw the New Deal laws and regulations as restricting growth particularly for the wealthy and preventing business shareholders from earning more money. Their answer was to get the government out of business by eliminating or modifying New Deal laws and regulations

One of their primary objectives was to eliminate the Glass-Steagall Banking Act. Four years after the 1929 stock market crash, Congress passed Glass-Steagall to separate investment banking from people's savings and checking account money. This was an eminently practical approach to try and protect the average citizen's "small money" from the big-time gamblers in the investment banking business.

In 1999, Congress, led by Sen. Phil Gramm and President Bill Clinton, passed the Financial Services Modernization Act, which killed key parts of the Glass-Steagall law and allowed investment banks, insurance companies and securities firms to consolidate through financial holding companies and use higher-risk tools to gamble with the new money they had access to. This bill was passed as bipartisan legislation.

Supporters of financialization make the case that financialization is the final or perfect form of free-market capitalism where profits are realized the quickest, costs are minimized, and the government is not allowed to interfere in the process.

But financialization is all about short-term strategies to make fast profits. The short-term strategy effort has been so successful that the financial sector grew as manufacturing and other sectors have declined.

What does financialization mean for manufacturing?

Financialization is about making short-term profits and cutting costs to satisfy high-risk investors looking for quick returns. This has caused a lot of problems for American manufacturing and threatens its growth over the long-term. Some of its effects include:

1. A decline in startup companies. "The rate of company formation is half of what it was four decades ago," says a February 2018 New York Times article. The innovation that startups bring is particularly important to manufacturing and high-tech, which rely on new ideas, technologies, and increased productivity for long-term growth. In her article, Foroohar links this decline with the U.S. financial industry's change in focus from lending to speculation. Many start-ups must now go overseas to get the second round of funding to expand.

2. Controlling public company boards. Financialization and big banks have a growing influence on corporate strategies. Players in the financial industry, particularly hedge funds, have amassed enough stock to gain spots on corporate boards and force short-term strategies. A good example is Dupont Chemical. A hedge fund called Trian Fund Management purchased enough Dupont stock to become its fifth-largest shareholder. Trian said publicly it wanted Dupont to double its share prices and cut $4 billion [PL1] from its business. Dupont submitted, cutting 5,000 people from their workforce, including 1,700 from their R&D lab. Dupont's share price climbed 210% between 2009 and 2015.

Carl Icahn did the same thing to both Apple and Xerox because he wanted them to return more cash to shareholders. Activity by these hedge funds and other short-term activists have skyrocketed in public corporations. John Coffee, a professor from Columbia University, found 1,115 activist campaigns in the United States between 2010 and 2015.

3. Long-term training. Financialization has also reduced the investment in long-term programs like apprentice training. I define long-term training as journeyman training that takes thousands (not hundreds) of hours. Even though manufacturing suffers from a critical shortage of high-skilled workers, corporations do not want to invest in long-term training because the ROI is too low.

4. Infrastructure. The American Society of Civil Engineers (ASCE) published a study (in 2009) that says it is going to take at least $220 billion per year for 30 years to repair and upgrade America's highway and bridge systems. Infrastructure includes water, sewer, ports, railroads, bridges, and the electrical grid systems. Making an investment in infrastructure could provide millions of manufacturing and construction jobs, but an investment in infrastructure using federal funds is simply not supported by financialization. The Trump administration and the Republican Congress are against federal funding because of the federal deficit we are carrying after the corporate tax cuts. It is worth noting that net government investing—government spending on infrastructure minus the depreciation of old infrastructure, was at .5% of GDP in 2015—much lower than the 1% to 2% range from 1970 to 2010, according to the Hutchins Center of the Brookings Institute.

The worst of the short-term profit strategies?

The most popular strategy used today for quick profits is called stock buybacks. Before 1982, this technique was illegal because of New Deal laws, because it was thought to be a form of stock market manipulation. But in 1982, stock buybacks were essentially legalized by the SEC.

Stock buybacks have become the most popular financial engineering tool in use today. When companies buy back their stock, they must pay above current market prices, or no one will sell. This drives the company's stock price up, no matter how good or bad the company is doing.

Stock buybacks became the fastest way increase wealth, and now companies borrow money to do it. According to Robert Reich in 2017, public corporations spent $780 billion on stock buybacks and dividends.

A recent example was in 2016, when United Technologies (UTC) announced it was closing the Carrier air conditioner plant in Indiana. UTC said publicly that the reason was that the labor costs in Mexico would save a lot of money. However, the Carrier plant was one of the most profitable plants in United Technologies. At the same time, UTC announced to share-holders a $6 billion stock buyback, after from pressure from 50 hedge funds and private equity investor firms. Many people believe that closing the Carrier plants was a way to help finance the stock buyback and drive up the stock price.

The innovation strategy

If we are going to use the strategy of innovation to be competitive in the world, then we must promote the manufacturing sector to continue to invest in the research and manufacturing of the new technologies and products that will allow the U.S. to compete. This means investing in capital equipment, research and development, basic science research and start-up companies for the long term. This won't happen as long as the financial sector is in charge.

Financialization is really hurting American manufacturers. If we keep on this course for the long-term, inequality will get worse, aggregate demand will not grow and manufacturers will be starved for investment.

However, financialization is very vulnerable because of its ongoing thirst for more profits. Here are some specific suggestions:

1. We need a financial transaction tax that would tax high-risk strategies and tools used to make big profits this includes taxing derivatives, hedge funds, and other bank speculation that leads to windfall profits.

2. We need to make stock buybacks illegal and to reimpose the Glass Steagall law that separates bank lending from speculation.

3. We also need to pass a law that insures that taxpayers do not have to bail out banks after they fail from speculation. Dodd-Frank is not strong enough, and the big banks are again too big to fail.

4. A suggested tax law change called bonus depreciation would allow 50% of a capital investment to be deducted immediately

5. We can also offer lower taxes on assets that are kept for the long term and raise taxes on assets sold in the short term.

6. We need to provide tax and other incentives to help manufacturers invest in long-term training.

7. And we need to publicly fund our infrastructure because the return in terms of jobs and reducing infrastructure failures is a real opportunity for the country and manufacturing.


 link to wolfstreet.com

This is How the Biggest Sector of the US Economy Is Doing

by Wolf Richter • Dec 12, 2019 • 133 Comments

Financialization of everything, Insurance Rules, Tech & Software Red-Hot, Health Care Eats into Everything. We can just sue each other to boost GDP.

By Wolf Richter for WOLF STREET.

Services-producing industries - not including government services - dominate the US economy, amounting to the equivalent of 70% of overall GDP by value added, and to 80% of the private sector economy. As long as the services-producing industries grow enough, it's tough for the US economy to fall into a recession. And in the third quarter, according to the Commerce Department's Quarterly Selected Services Estimates, revenues by the services-producing industries rose 4.9% from a year ago, to a record $4.11 trillion (not seasonally adjusted). For the first three quarters of the year, revenues rose 5.2% to $12.1 trillion:

Four huge industries dominate the services sector and together generated $2.94 trillion in revenues in Q3, accounting for 71.5% of total service revenues (share of each compared to total services revenues):

Finance and insurance: 31.6%.
Healthcare: 16.7%
Professional, scientific, and technical services: 12.6%
Information services: 10.7%.

During the Financial Crisis, financial and insurance services were getting hit hard as banks were in the process of collapsing, and real estate, which is also hefty, was already collapsing. And it spread from there. That's what it takes in the US to cause a deep recession - the biggies have to give and contagion has to spread.

But now services-producing industries are growing, and financial and insurance services are hopping, and insurance services alone are blowing them all away - as consumers have no doubt noticed, because someone has to pay for it when the US economy is becoming ever more financialized. So here we go, by sector.

#1 Finance and Insurance.

Finance-and-insurance revenues jumped 6.6% to a record $1.3 trillion in Q3. For the three quarters so far in 2019, revenues jumped 6.7% to $3.84 trillion:

Unlike government services, the Federal Reserve is included in finance and insurance revenues because its 12 regional Federal Reserve Banks are owned by the financial institutions in their districts and thus are part of the private sector. The Fed's revenues are largely from interest earned on the $4 trillion in bonds it holds. In Q3, revenues fell 11.7% year-over-year, to $25 billion. But in terms of revenues, the Fed is a bit-player in the industry, accounting for just 1.9% of total finance and insurance revenues.

The giant in this group is the "insurance" category of finance and insurance. Insurance dominates the industry both in magnitude and growth, with revenues soaring 8.2% in the quarter to $733 billion. In other words, 18% of all services revenues are from insurance.

The "finance" category includes the banking sector, whose revenues grew by 5.1% year-over-year to $361 billion. This includes commercial banks (they take deposits) and nonbanks or shadow banks (they don't take deposits). As the table below shows, in terms of revenues, they're neck to neck. Both grew just over 5% in the quarter, and over 7% year-to-date (if your smartphone clips the five-column table, slide the table to the left):

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Finance & insurance 1,299 6.6% 3,836 6.7%
Finance & insurance (except the Fed) 1,275 7.0% 3,758 7.1%
The Fed 25 -11.7% 78 -8.4%

Banks & Nonbanks 361 5.1% 1,074 7.1%
Deposit-taking banks 167 5.2% 492 7.1%
Nonbanks 167 5.1% 501 7.4%
Activities related to credit intermediation 28 4.3% 81 4.5%

Securities, commodity contracts, and other financial investments 180 6.0% 527 3.0%
Securities and commodity contracts, intermediation and brokerage 82 7.7% 242 4.1%
Securities and commodity exchanges 3 24.9% 10 11.4%
Other financial investment activities 95 4.1% 276 1.8%

Insurance carriers and related activities 733 8.2% 2,157 8.2%
Insurance carriers 631 8.5% 1,858 8.7%
Agencies, brokerages, and other insurance related 103 6.9% 299 4.8%

#2. Healthcare and Social Assistance

Healthcare and social assistance revenues rose 4.4% year-over-year to $690 billion in Q3 and 4.8% year-to-date to $2.1 trillion. However, these are services only and do not include the goods-portion of healthcare, such as pharmaceutical products, medical devices, supplies, etc.

The largest of the four categories, "ambulatory health care," generated $271 billion in revenue in Q3, of which $133 billion was generated by doctors' offices. Note that the growth rates vary, with revenues at medical and diagnostic labs growing only 0.9% year-to-date but revenues at hospitals overall growing 5.5% and at specialty hospitals soaring 7.1%:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Health care and social assistance 690 4.4% 2,064 4.8%

Ambulatory health care (doctors, diagnostics, outpatient, home health care) 271 3.6% 802 3.2%
Offices of physicians 133 3.1% 392 2.5%
Outpatient care centers 37 7.5% 111 6.1%
Medical and diagnostic laboratories 13 1.0% 39 0.9%
Home health care services 22 1.3% 65 2.8%
Other ambulatory health care services 10 5.8% 29 3.8%

Hospitals 302 4.5% 912 5.5%
General medical and surgical hospitals 281 4.3% 849 5.4%
Psychiatric and substance abuse hospitals 7 4.4% 21 3.7%
Specialty (except psychiatric and substance abuse) hospitals 14 7.8% 42 7.1%

Nursing and residential care facilities 67 6.0% 199 6.6%

Social assistance 50 5.9% 151 6.6%
Individual and family services 26 3.7% 80 6.5%
Community food and housing, and emergency and other relief services 9 10.8% 26 7.2%
Vocational rehabilitation services 4 3.1% 11 5.7%
Childcare services 11 8.8% 34 6.5%

#3. Professional services

Professional services revenues jumped 6.0% in Q3 to $516 billion; and rose 4.7% year-to-date to nearly $1.51 trillion. The largest category, "computer systems design and related services," generated $117 billion in revenues in Q3, up 5.8% year-over-year. The second largest category is lawyering, which is booming, of course, with revenues growing 6.6% in Q3 to $88 billion. Year-to-date the sector is close to a quarter-trillion bucks. We can all just sue each other to boost GDP.

Advertising services had declining revenues. However, these services (NAICS code 5418) do not include the amounts of running the actual ads, which fall under various other revenue categories, such as in publishing, broadcasting, etc. This category here only includes revenues at ad agencies and the like that create ad campaigns and place them in the media.

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Professional, scientific, and technical services 516 6.0% 1,513 4.7%
Legal services 88 6.6% 246 4.8%
Accounting, tax preparation, bookkeeping, payroll services 42 5.6% 144 3.4%
Architectural, engineering, and related services 92 6.5% 264 3.0%
Computer systems design and related services 117 5.8% 343 7.0%
Management, scientific, technical consulting services 75 8.5% 213 5.5%
Scientific research and development services 46 6.0% 139 8.6%
Advertising, public relations, related services 26 -1.4% 76 -2.0%

#4. Information Services

Revenues rose 5.8% to $434 billion in Q3, and 6.2% year-to-date to $1.28 trillion. But this growth was very unequally distributed. A number of categories have declining revenues, particularly in the paper publishing segments. Telecommunications, the biggie, was stagnant at $158 billion in Q3.

But revenues at software publishers soared 13.2% in Q3 to $70 billion, revenues at firms that provide data processing and hosting services (think "the cloud") skyrocketed by 17.9%, and other information services soared by 15.6%:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Information 434 5.8% 1,281 6.2%

Publishing industries (except Internet) 93 8.4% 277 8.6%
Newspaper publishers 6 -4.9% 18 -3.3%
Periodical publishers 6 -4.7% 19 -4.1%
Book, directory and mailing list, other publishers 11 -3.6% 29 -4.4%
Software publishers 70 13.2% 211 13.3%

Motion picture and sound recording industries 27 -1.4% 83 0.2%

Broadcasting (except Internet) 42 0.7% 127 1.8%
Radio and TV broadcasting 21 1.9% 63 4.4%
Cable and other subscription programming 21 -0.4% 64 -0.6%

Telecommunications 158 0.4% 471 1.6%
Wired carriers 78 -0.2% 234 0.4%
Wireless carriers (except satellite) 67 0.2% 200 2.0%
Other telecommunications 13 5.0% 38 6.7%

Data processing, hosting, related services 55 17.9% 155 15.5%

Other information services 59 15.6% 168 15.2%

#5: Transportation services

Revenues in this sector — from transporting regular folks by aircraft to pumping natural gas through pipelines — barely ticked up 1% in the quarter to $255 billion and 2.3% year-to-date to $746 billion. Overall growth was dragged down the by the decline in trucking.

Revenues at trucking and delivery companies, the sector's largest category, fell 2.9% in the quarter and 1.4% year-do-date, in line with the downturn in the trucking industry:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Transportation and warehousing 255 1.0% 746 2.3%
Air transportation 60 2.8% 173 3.6%
Water transportation 13 1.5% 36 5.5%
Truck transportation 75 -2.9% 218 -1.4%
Transit and ground passenger 9 2.0% 30 3.8%
Pipelines 13 3.6% 39 4.5%
Scenic, sightseeing transportation 1 11.4% 3 11.6%
Support activities for transportation 48 -0.3% 145 1.6%
Couriers and messengers 25 7.6% 75 6.5%
Warehousing and storage 10 4.0% 29 7.0%

#6: Administrative & Support Services.

Revenues ticked up just 0.8% in the quarter to $231 billion, but grew 3.0% year-to-date to $681 billion:
Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Administrative and support 231 0.8% 681 3.0%
Employment, and travel reservation servies 105 -0.3% 313 4.4%
Travel arrangement and reservation services 13 -2.3% 38 -0.1%
Other administrative and support services 113 2.2% 330 2.1%

#7: Rental and leasing services.

These are the services involved in renting and leasing, not the actual rent payments and lease payments. Total revenues grew 6.8% to $195 billion in the quarter. Real-estate renting and leasing activities dominate this sector, growing at 8.0% in the quarter, to $136 billion:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Rental and leasing, real estate, auto, etc. 195 6.8% 552 6.5%

Real estate 136 8.0% 382 7.3%
Lessors of real estate 74 4.3% 215 6.0%
Offices of real estate agents and brokers 32 11.2% 85 6.1%
Activities related to real estate 30 0.0% 82 0.0%

Rental and leasing services 46 2.3% 133 4.1%
Auto, truck, equipment rental & leasing 18 3.7% 51 5.3%
Consumer goods rental 6 3.8% 18 3.6%
Commercial, industrial machinery, equipment 21 0.9% 62 3.5%

Lessors of nonfinancial intangible assets (except copyrighted works) 13 10.8% 37 6.8%

#8: Utilities

These revenues by utilities do not include revenues by government-owned utilities but only privately-owned utilities. And they only include revenues from services, such as line charges for distribution, but not revenues from the products such as natural gas, and those revenues ticked down in the quarter and year-to-date:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Utilities 158 -0.5% 449 -0.2%
Electric power generation, transmission and distribution 136 -0.4% 362 -0.3%
Natural gas distribution 18 -1.2% 76 -0.1%
Water, sewage and other systems 4 -1.1% 11 -0.5%
#9: Arts, entertainment, and recreation.
Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Arts, entertainment, and recreation 78 4.5% 218 6.5%

Performing arts, spectator sports, & related 35 2.0% 94 5.0%
Performing arts companies 5 1.8% 14 3.1%
Spectator sports 13 4.6% 33 3.1%
Promoters of performing arts, sports, and similar events 9 9.3% 25 12.0%
Agents, managers for artists, athletes, entertainers, and other public figures 2 0.9% 7 9.4%
Independent artists, writers, and performers 5 0.0% 15 0.0%

Museums, historical sites, and similar 4 -7.6% 12 -1.9%

Amusement, gambling, and recreation industries 39 8.3% 112 8.8%

#10: Accommodation Services.

Revenues grew 4.4% in the quarter to $67 billion. For the full year 2018, this sector was the only one that booked a revenue decline.

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Accommodation, traveler and RVs 67 4.4% 191 2.8%
Traveler accommodation 64 4.4% 185 2.7%
RV (recreational vehicle) parks and recreational camps 2 6.0% 5 6.0%
#11: Some other services.

Waste Management and Remediation, small, but growing at a good clip:
Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Waste management and remediation services 27 4.5% 79 5.7%

The hodgepodge that doesn't fit anywhere else lineup, also grew at a decent clip in the quarter, and at strong clip year-to-date:

Q3 2019, $ billions Change fr. Q3 2018 YTD 2019, $ billions Change fr. YTD 2018
Other services (except public administration) 144 3.6% 432 7.0%
Repair and maintenance 48 6.0% 141 2.9%
Death care services 5 -0.9% 14 -1.3%
Dry-cleaning and laundry services 8 2.7% 23 4.3%
Religious, grant-making, civic, professional, similar organizations 66 1.1% 200 11.3%
And a recession?

Revenue growth in services being this strong, and with services dominating the economy, it would require a major downturn in the already weak goods-producing sector to drag the overall economy into a recession.

On the other hand, the downturn could originate in services — such as financial services as was the case during the Financial Crisis, or a tech bust as was the case in 2000 — which, given the magnitude of these services, would quickly drag down the overall of the economy. But that's is not happening yet.

(Financialization documentary) The Money Deluge and other references 23.Apr.2020 05:58


17.Dec.2019 19:16

(Financialization documentary) The Money Deluge: How The Rich Get Richer
author: Deutsche Welle

(42:24)  http://www.youtube.com/watch?v=t6m49vNjEGs

The Money Deluge: How the Rich get Richer

• European zero interest rates and how it impacts ordinary citizen savers.
• Global economy awash in, 'avalanched' with "cheap money" in ever-increasing quantities.
• Central banks (European Central Bank, Bank of Japan, Federal Reserve) — i.e. the nation-state currency-issuing entities — buying up all debt and bond market assets, globally.
• Real estate wheeled-dealed, bought out and jacking up of housing costs/prices by masked financial entities with no relation to native residents or economy, in locales across the world.
• German bank advisor to her client (about his own money in his savings account) : "Since you're earning almost no interest we have to see where we can generate a return."
• Large transnational corporations wheeling-dealing multi-billion Euro/dollar takeover and repurchase agreements (which without such freely-available central bank-pumped money would never come to fruition) buoyed by ultra-low interest rates.
• Trump administration (in only 3 years) — with the Federal Reserve as fiat money-creation spearhead — has outspent, and increased deficit spending and U.S. national debt amounts of the Obama adminstration era by vast orders of magnitude.
• Debt- and loan-based economic model upon which not only private corporations but also banks, governments and citizens are utterly dependent — and part of an ever-inflating gigantic bubble.
• Zurich (Switzerland) citizen : "I'm a former banker, now retired. I can't say that with pride anymore. They're casinos now."
• a YouTube user comment : " If watching this in 2017 was scary try watching it in 2019 lol "


N.B. the ^ sections on *Financial turnover compared to gross domestic product (GDP), and *Futures markets



*Financialization* has replaced 'capitalism'.

the "one purpose" of the 'market' / a "free market" is to DETERMINE FAIR VALUE.

when Fair Value is no longer actually determined by a price-determining mechanism or market actions, but rather by FINANCIALIZED, derivative leveraged, fiat currency market bubbles which infect and affect _all_ financial markets including stocks themselves (witness the rapid uptick in Boeing stock past few days after U.S. government bailout announcement - is it humanly possible that retail investors actually purchased that stock themselves, giving it that boost in valuation??) real estate valuations, insurance, bonds, debt/loans?

Speculative 'fictional' economic value which has absolutely nothing to do with the Real Economy or real economic activity. Magnitude of which far exceeds the output or real product of the actual working economy.

Financial turnover (derivatives, futures) vs. GDP since the 1970s is massively disproportionate
( see the Wikipedia 'Financialization' page URL below )

Federal Reserve (under guise of "virus quarantine") mandates planned shutdown of entire U.S. economy with 30% unemployment?
PRIVATELY HELD BANK ENTITY is mandating, officially ^advocating this?

is this even 'capitalism' any longer? No.

are there economic cycles any longer?
When the entire system is constantly, repeatedly bailed out by fiat currency issuances?

( aside from the relatively small portion of the fiat currency actually issued directly to the populace via "helicopter money" or "one time bailouts"..... Here discussing the corporate bond/debt buyouts, corporate stock buybacks et cetera implemented by Wall Street banks at behest of privately owned U.S. Federal Reserve central bank. Most of the bailouts are going to financial high net worth entities to cover their derivative casino transactions, overnight repo etc. )

Current debacle in global crude oil market is COMPLETELY rigged —
after 2 months of global transportation inactivity, crude oil production market will 'magically' rebound to previous output, activity and prices? Gigantic glut exists due to the demand plummet.

10 million people have just lost their jobs. Magically, crude oil use and demand is going to spring back from persons who can't afford cars or airline tickets?

Businesses that were in the red (unless like certain giant corporations they receive a multi-billion dollar bailout) and leveraged in debt to their neck, will magically somehow spring back into action after the quarantine? Even with the 'bandaid' small business "loans" (in Fed-printed fiat dollars).

--> Consumer debt (REMEMBER: consumer activity is 70 percent of the U.S. economy), business corporate debt, and government debt is ORDERS OF MAGNITUDE beyond what it was 30 years ago.

Entire system is based on *debt* :
- the currency
- businesses' balance sheets
- sovereign (governments') debt is off-the-charts, almost unmeasureable world wide
- stock investors' assets bought on margin
- personal balance sheets of citizens entirely leveraged in credit card debt

(interview) Grant Williams: "At What Point Does The Madness Stop"?

.."We have created this [post-2008 global economic environment] through every attempt to minimize [corporation-manufacturer-retailer] costs and maximize [leveraged/Loan-based] margins, and we've done so against a [credit card-bogged] consumer who can not afford to pay rising prices. So everything is being forced back to the bone."

"Everything — if you look at what has happened since 2008, with interest rates at 0% and [thus] abundant capital which has enabled all of these billion-dollar unicorns to burn money — and you know, I don't want to get talking about Tesla but it's the perfect example. It's lost money seventeen years in a row. And, obviously we've seen [TSLA stock price whipsawing ludicrously up-down] what's happened in that recently. There is no company in history that would have 60, 70, 80, 90, a hundred billion dollar valuation that had not made money for 17 years in a row. And it's only been afforded that luxury by zero cost of capital."

"So, here we are. We've created this world around us. The consumer needs these companies to lose money, because if Uber was a money-making enterprise for example, people wouldn't be able to pay for an Uber. And so here we are. You're getting cost pressures on the consumer side, you're getting demand pressures. And none of this works. Fundamental principles of economics — nothing we have built around us, works. There's a perfect example of this, Louis Vuitton LVMH [luxury goods company] recently wanted to buy Tiffany, and they issued 10 billion dollars of bonds in order to fund the acquisition of Tiffany; a large proportion of which (we don't know for certain since they don't release the holdings, but) you can very safely assume was purchased by the ECB [European Central Bank]. They placed that bond at negative interest rates. So, Louis Vuitton has been funded by the ECB, been paid, to borrow the money to buy Tiffany. I mean, at what point does the madness stop?"


The Federal Reserve's Interest Rate Black Hole From Which Even It Will Be Unable To Escape

The Fed has entered its 'Thelma and Louise' moment. It has had the monetary pedal to the metal since the system died in 2008. Now they are too close to the cliff edge to stop without causing a collapse. The virus has popped the massive stocks-bonds-real estate bubble and arrested the real economy putting monetary velocity at virtual zero. In short, the fiat currency debt-based monetary system has died and nominal valuations are collapsing. The Fed knows this and is flooring the monetary gas pedal, knowing that the system has past critical, and figures: we're dead either way; let's do the only thing we can do (create credit and currency and buy everything) and maybe a miracle will happen. They are also vainly buying up the Treasury bond market and thus manipulate associated interest rates *to prevent yield curve inversion*. Interest rate control (and moreover inference / recommendation of rates) is the Fed's _actual_ purpose.

This is the end game. The Fed cannot save the fiat currency system because growth can no longer sustain (sovereign/corporate/consumer) debt levels. Further, confidence has cracked and the virus is the final coup de grace. Obtain food, water and essentials now because when credit lines fail supply lines will follow. Get some form of security, and into hard assets that do not rely on the Fed or paper credit to hold purchasing power: gold, silver, platinum. At present cash (the U.S. dollar) is king and the most demanded asset on the planet — largely via eurodollar time-dependent deposits/transactions, which most non-U.S. countries, entities and corporations rely on simply to pay debts. However, once foreigners have cleared their dollar-denominated contracts (debts and bonds) the dollar will collapse against gold; severe stagflation is coming and will persist for years. This is a mathematical certainty. Take this window of opportunity to convert your dollars into tangibles while you still can.


3 Federal Reserve Secrets You've NEVER HEARD! (#2 Is Mind Blowing)
63,196 views • Apr 1, 2020
George Gammon

Federal Reserve intel YOU NEED TO PREPARE for future of the economy. We all know the Federal Reserve has come out with QE infinity and all the 4 letter, alphabet soup programs, but the reasons will shock you. We're also led to believe that the Federal Reserve has things under control, especially the EFF or Effective Fed Funds Rate. This is their benchmark rate we all hear about in the news. When the Fed "raises or lowers rates" that's the interest rate they're referring to. But the Federal Reserve has secrets they don't want you to know. One of which is they really don't control the EFF. If you pull back the curtain (like we do in the video) you'll see the Effective Fed Funds Rate is anything but calm and stable. If you're interested in the Federal Reserve, central banks, inflation, the US dollar, gold, silver or bitcoin THIS IS FOR YOU!!

In this Federal Reserve video I discuss the following:

1. How the Fed can't let interest rates go above a certain level.
2. The Fed really doesn't control the Fed Funds Rate.
3. The Fed has no choice but to implement "money printing infinity"


Federal Reserve's Balance Sheet Blasts To $5.8 Trillion, Is Bailing Out Foreign Banks
03.Apr.2020 19:42

Dark Secrets In The Fed's 2007-2011 Wall Street Bailout Get Makeover In Today's Bailout
31.Mar.2020 20:33

Federal Reserve Opens Up 'Temporary' Facility To Supply Global Private Central Banks
31.Mar.2020 20:03

Federal Reserve Owns 15 Percent Of Treasury Bond Market, Could Own ALL In < 2 Years

The Federal Reserve's 'Cure' Is Worse Than The Disease

Stock Market During Shutdown = ABSOLUTE PROOF "Strong Economy" Is A Total LIE.

Why No Hyperinflation? Yet...

National Socialism Global Takeover By Federal Reserve.

Stimulus Bill Allows Fed $454 Billion Slush Fund for WS Bailouts, Conduct Secret Meetings

Stimulus Bill: The Fed and Treasury's Slush Fund Is Actually $4 Trillion

This Is The Fear Chart That The Smart Money On Wall Street Is Watching

PROOF: Wall Street's Crisis Began 4 Months Before First Reported China Coronavirus Death

2020-03-24: Stock Market's Largest Ever Single-Day Gain BOUGHT BY Federal Reserve.

$2 Trillion Congress 'Stimulus Package': Fed Right Now Expending That *EVERY 2 HOURS*

T-Bond Yield Diving, Oil Below $20/Bbl, Global Economy DESTROYED BEYOND RECOGNITION.

Crude Oil Price Goes NEGATIVE, No Price Discovery Remaining In Stock Market

If I Ran My Personal Finances Like The U.S. Government, Wall St Banks + Federal Reserve Do

Century Of Enslavement: The History Of The Federal Reserve 27.Sep.2014 13:22
Posted originally 27.Sep.2014 13:22

Americans Are Paying A Tragic Price For Allowing Five Banks To Control The U.S. Economy

Federal Reserve Bails Out Wall Street, Corporations — Full Breakdown, How It Affects *You*

COVID-19 Forces The World To Re-Think The Idea Of 'Monetary Value'

Western society has long been gripped by a deep seeded belief in money. Trillions of dollars of bank notes tied to ever-growing mountains of un-payable national debts has taken on a life of its own over the years. As the post-1971 years rolled by, society increasingly lost a sense that this human invention called "money" was created to serve humanity rather than rule it, and with that lost sense, money became an idol of worship.

Decades of this modern religion have resulted in an incredibly tragic situation: a disproportionate wealth distribution in the hands of the 0.1%, an over-bloated services/consumer driven economy, increased rates of poverty and despair internationally as well as a dismal loss of vital skills, and productive capacity once enjoyed by advanced industrial nations just four decades ago. Vital infrastructure built up during the 1930s-1960s has been permitted to decay through simple neglect while un-payable debts have reached record highs.

Then like a thief in the night, the illusion was ripped away.

This "missing something" is clearly demonstrated by the continued obsession with money as new bailouts of the collapsing speculative banks have now risen to a $1 trillion/day overnight repo loan to collapsing banks which is added to the $1 Trillion 14 week loans offered every week that will dramatically increase the $9 trillion already emitted since helicopter money began in earnest in September 2019. With the mass panic and economic shutdown instigated by COVID-19, markets have lost over 30% of their value and fears of a new great depression have spread far and wide. Rather than impose serious bank regulation like Glass-Steagall to break up the commercial from speculative banks as was done in 1933, the American government has merely unleashed unlimited money printing. This bipolar response is akin to trying to stop a raging fire with a combination of water and gasoline.

Federal Reserve's Bullard: >FASCIST< "Planned Shutdown Of Economy" With 30% Unemployment

CBDCs: Central Banks/Federal Reserve To Implement Global Debt-Based Blockchain Money Unit

Financial Expert: Central Banks Fostering Global Collapse By Design

The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Debt-based financialized fiat currency model has replaced "capitalism"

Why The Coming Economic Collapse Will NOT Be Caused By Corona Virus

Why The Coming Economic Collapse Won't Be Caused By Coronavirus (Part 2)

Wall Street Expecting TRILLIONS More Cash Directly From The Fed.

Multi-Trillion $$ Helicopter Drop: Federal Reserve's Infinite Leverage For Any Collateral

Fed Unleashes Bazookas! Will It Cause Hyperinflation? (Explained)

Federal Reserve: $1 Trillion Repo Ops -->*PER DAY* For Next 2 Months (!!!!!!!!!!!)

Federal Reserve Begins Buying Junk Bonds, To Bail Out Hedge Funds

Friday March 20, 2020 SPECIAL REPORT: The Obama Bubble

The New York Fed, Owned by Multinational Banks, Is Nationalizing Capital Markets


Economic Collapse : A Crack In The Debt Market Bubble HAS NOW OCCURRED.

November 2019 — U.S. Corporate Debt Reached $10 Trillion = 47 PERCENT OF OVERALL ECONOMY.

Debt-based economic model: Can the US dominate the global financial system forever?

What you are seeing now is just the Opening Act of what's coming

Debt Saturation Meltdown — Global Economy In Free Fall

2020-03-12: Market Meteor-Cratering Even After $1 Trillion Federal Reserve Shotgun Blast

Repo Madness Clown Show: Fed Discusses Loaning Directly to Hedge Funds For Bailouts

Obama And Trump: The Two Best Friends The Fed Has Ever Had

Federal Reserve: "Current Monetary Policy Will Likely Remain Appropriate"=NEW WORLD ORDER

TRUMP [to Federal Reserve]: More Easy Money Please... IN YOUR FACE.

Federal Reserve Cuts Interest Rates For Third Time In 2019

US Federal Reserve Starts "Quantitative Easing Forever"

The Federal Reserve Has A Repo Problem. What's That?

Sen. Warren Grills Treasury Secretary Mnuchin On Federal Reserve Repo / Overnight Lending

Trump, while simultaneously calling for devaluation of the/a weaker U.S. dollar, is outspending Obama by enormous magnitude :
Late 2019 Economics: We've never seen anything like this. Not even under Obama

The Fed Protects Gamblers at the Expense of the Economy

The Disaster Of Negative Interest Rates

The Silence On Wall Street's Dark Pools Is Deafening

Financial N-Option Will Settle Trump's Oil War

IMF: Global economy, financial system on brink of disaster

IMF and Word Bank Heads Debate Growing Debt Problems

The way out for a world economy hooked on debt? More debt

Paul Volcker's Long Shadow

post-1980s-Reagan-Thatcher Financialization has replaced 'capitalism' —
total debt levels and deficit spending of the past 30 years has eclipsed that of the past few centuries of Western civilization; while central banks, led by the U.S. dollar-based Federal Reserve continue to issue debt note fiat currency which perpetuates an utterly 100% fake global 'economy'.