America Has a “Neo-feudal” System

The conventional definition of a Bear is someone who expects stocks to decline. For those of us who are bearish on fake fixes, that definition doesn’t apply: we aren’t making guesses about future market gyrations (rip-your-face-off rallies, dizziness-inducing drops, boring melt-ups, etc.).

No, we’re focused on the impossibility of reforming or fixing a broken economic system.

Many observers confuse creative destruction with profoundly structural problems. The technocrat perspective views the creative disruption of existing business models by the digital-driven 4th Industrial Revolution as the core cause of rising income inequality, under-employment, the decline of low-skilled jobs, etc. — many of the problems that plague the current economy.

I get it: those disruptive consequences are real. But they aren’t structural: crony capitalism and the state-cartel system is structural, because cartels can buy political protection from competition and disruptive technologies. Just look at all the cartels that have eliminated competition: higher education, defense contractors, Big Pharma — the list is long.

The fake fixes to the structural dominance of cartels and entrenched elites come in two flavors: political reforms that add complexity (oversight, compliance, etc.) but never threaten the insiders’ skims and scams. And monetary policies such as low interest rates and unlimited liquidity that enrich the already-wealthy by funneling whatever gains are being reaped to them rather than to labor.

I explain how this neo-feudal economy is the inevitable result of our system in my new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic.

Our political system, dependent on campaign contributions and lobbying, is easily influenced to protect and enhance the private gains of corporations and financiers. Combine this with the gains reaped by those with access to cheap credit and you have a financial nobility ruling a class of debt-serfs.

Cartels and quasi-monopolies eliminate competition by buying start-ups and political protection, raising barriers to entry for upstarts. This kills innovation and productivity, which are corralled to serve existing cartels.

The wealthy own productive assets, the poor own debt. Debt accrues interest which flows to those who own the debt — student loans, auto loans, mortgages, etc.

Wages have stagnated for the bottom 80% for decades for a variety of reasons. But quantitative easing and zero real interest rates haven’t fixed this structural problem — rather, they’ve exacerbated wealth and income inequality:

Meanwhile, the highly profitable credit machine is no longer boosting growth. It took $4 in new debt to create $1 in GDP in 2016, for example. Needless to say, that’s not a lot of bang for the buck.

Our neo-feudal system has offered perverse incentives to borrow vast sums to buy back stocks and other unproductive uses benefit the few at the expense of the economy as a whole.

Beneath the bullish narrative of eternal growth and ever-rising profits, the financial system’s buffers have been thinned. As I explain in my book, the global financial system is now “hyper-coherent,” meaning that instability in one corner of the system quickly spreads to the entire system.

This systemic vulnerability is largely invisible, and so the inevitable contagion will surprise most observers and participants.

A funny thing happens in a fast-spreading financial contagion: markets go bidless, meaning there’s no buyers at any price. The entire global financial system rests on this one assumption: markets will always be liquid, but liquidity vanishes in contagions.

The fake-fix of the past decade is for central banks to buy impaired assets to create an artificial market. That works if you throw trillions of dollars, yuan, yen and euros into the artificial market, but that process destroys organic markets.

Fake fixes don’t fix what’s actually broken. They’re duct tape holding together a broken system.

The basic idea here is the socio-economic-political system is structured such that the only possible output is neo-feudalism. In other words, neo-feudalism isn’t a flaw in the system that can be changed with policy tweaks or electing a new president or prime minister — it’s the result of the system working as designed.

Neo-feudalism is a peculiarly invisible hierarchical structure of power: The New Nobility (or aristocracy if you prefer) wields vast concentrations of political, social and financial power, and does so without the formalized aristocrat-serf relationships and obligations of classic neo-feudalism.

We appear to be free but we’re powerless to change the power asymmetry between the New Nobility and the commoners. This reality is reflected in social relations that form just appearances of actual power, pantomimes acted out in media-theaters to instill the belief that the old myths of democracy and social mobility are real rather than misleading shadows.

Neo-feudalism is fundamentally a financial-political arrangement, marketed and managed by cultural elites who strive to convince us that we still have some shreds of power. These elites have a variety of tools at their disposal. One has been described by filmmaker Adam Curtis as pantomime: Trump says or does something outrageous, the Democrats cry “impeachment,” and so on.

This theater of pantomime serves two purposes: it projects a simulation of functional democracy that makes us believe impeaching one president and getting another one in office will change anything about the neo-feudal power structure; it won’t.

The theater of pantomime also distracts us from the remarkably stable asymmetry of power in our social-political-financial construct:

Various ambiguities are blown into “the most important issue of today,” a revolving performance in which virtue-signaling has replaced actual action to remedy the vast imbalances of power, and appeals to myths that no longer manifest in the real world (democracy and social mobility). They are used to suppress and marginalize the search for new structures that would upend the cozy incest of neo-feudalism’s financial and political power.

Again, I discuss the structure of neo-feudalism in my new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic at some length. One key takeaway is this:

$100 million invested in influencing the central state guarantees $1 billion in private-sector profits. Or $10 billion. The point is the return on investment is unbeatable, and so is the security of the gains.

This marriage of state power to create credit and its monopoly on force with private-sector financial power is the core relation of neo-feudalism. The only possible output of this structure is a mass of powerless debt-serfs enriching the New Nobility, who are slavishly served by a class of “liberal” technocrats and managers tasked with promoting pantomimes passing as “the real thing.”

Despite the ubiquity and sophistication of this marketing and management machinery, the debt-serfs sense the entire system is both false and precarious, two intimately related realities, for fakery is always precarious: the truth about the asymmetries of power might slip out and spread like wildfire.


Charles Hugh Smith
for TheDaily Reckoning

The Daily Reckoning