oftwominds

Exiting the U.S.A.

noreply@blogger.com (Charles Hugh Smith) — Sat, 11 Jul 2009 15:06:00 +0000

A number of readers have expressed interest in exiting the U.S. as a means of avoiding the coming meltdown of The American Dream. Here is the view of one American who moved to New Zealand in 2001.

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When the economy tanks, the number of people who ponder leaving the country increases. Back in the dreary days of the deep 1981-82 recession, I knew people who were discussing moving to Costa Rica--still a favorite fantasy-getaway for well-funded U.S. emigrants.

Recently, Panama has emerged as another Central American destination for those who dumped their McMansions and/or who have pensions. One of my old friends' daughters lives in Panama (married to a Panamanian) and while I haven't visited yet it seems life is good in Panama if you have a few dollars or a job on the Canal.

Life is good, but different. Not just in Central America, but anywhere new, even in America. (I could ask Don E. to describe the culture shock of moving to Maine, and I can report that Hawaii is very different from the U.S. mainland. Iowa is different from California which is different from Texas and so on.)

This photo is of the bakery in the village where my brother lives in the south of France. He has lived abroad, in India and France, for several decades. France remains very popular with that class of Americans who hanker to restore a crumbling chateau--and there remains any number of majestically crumbling chateaus awaiting your ambitions (and millions).

But it is best to set aside the fantasy-invoking idyllic books and understand France (and every region therein) is not at all like the U.S. This appears obvious but the differences keep revealing themselves the longer one lives there.

Here is a photo of a Bangkok teahouse, located in an old district rarely visited by farangs. (That's me in the sunglasses on the right.) Asia is of course quite different from the U.S., and while the excitement of these differences is enthralling and stimulating, forever being an outsider can eventually become wearing.

On the other hand, many expats cannot imagine ever returning the land of their birth, especially if they have married into another culture and language as well as another family.

There are places I could live for an extended time--Paris, Bangkok, Kyoto, Suzhou, to name a few--but to "move away" from the U.S.--no, I cannot. I find myself sympathizing with the Robert Redford character in Three Days of the Condor who, when presented with the option of moving to Europe to escape being assassinated by the C.I.A. pauses and then answers: "I was born in the United States, Joubert. I miss it when I'm away too long."

Joubert (a free-lance assassin/contractor): "A pity."

Redford: "I don't think so."

However, life is an adventure and being an expat has great rewards for those up to the challenge. Here is Michael Reps' commentary on moving to New Zealand, a nation high on many lists as a locale which seems likely to escape the brunt of a Peak Oil/Peak Credit/Peak Everything meltdown.

Leaving the USA, An Insiders Guide
Pssst…Hey you…Yes you……Over here…Shhhh..Be very very quiet, and don’t tell any one, but democracy and capitalism are alive and well. You may not know this but freedom is a human precept, not an American one, and it doesn’t go away the minute you leave American Soil.
I came across Charles Smith’s site during a Google search for the topic “Leaving the USA”. I noticed the absence of advertisements for ammunition reload kits and raccoon jerky recipes for the coming Armageddon so thought to myself, perhaps I won't get flamed for sounding pro-New Zealand with my views about leaving the USA.
On that note let me give you a little background on myself. I do, in fact, know how to reload ammo and make jerky meat, I learned it while a paratrooper in the 82nd Airborne and again as a Captain in the USMC. I was born and raised in California where I spent my formative years brow beaten by Catholic Nuns with thick ankles and short fuses in the mid-Wilshire area of Los Angeles. My formal education is a degree in philosophy from Claremont McKenna College.
After the Marines I spent the next 15 years involved in the financial markets where I surmised that the US was heading for a cliffdive economically which ultimately led to me emigrating to New Zealand in July, 2001. Borrowing money to pay for borrowed money simply doesn’t work unless you can import new borrowers at a greater rate than the debt being created.
Now, Just as you see all those wildebeests on the Serengeti scraping their hooves into the dry barren soil in search of water, I direct your attention to another path. Not down deeper into that soil, but off the beaten path to another watering hole. But as I said, don’t make too much noise or a stampede will erupt and as the Zimbabweans I have met are fond of saying to me, “The difference between an immigrant and a refugee is only timing”.
You see, 300,000 people leave the USA every year according to loosely compiled data by the US Census. Interestingly, that number may be set to rise according to a report issues by the Migration Policy Institute. Have a look at this study for further information. America's emigrants.
New Zealand, on the other hand takes in about 40,000 people per year under their various visa schemes. And more Americans are coming. I should know, I help them in for a living with my company.
There is one point of distinction you should know about moving to New Zealand, that is, the difference between the egalitarian and imperialistic undertones of each society. I believe it is these underpinnings that lead to the differences between the two countries. Both whose origins and legal systems go back to Great Britain.
New Zealand is a very egalitarian society of 4 million people. This means that wealth distribution, while not socialistic, is viewed with a healthy scepticism and CEO Salaries in the stratosphere are a hard sell. Everyone’s viewed as entitled to a “fair go”. Also with a land size the area of Colorado this means that crowds are not an issue nor a draining of resources. The “close the door behind” you mentality seen in small provincial towns in the US is non-existent here.
New Zealand is also outward looking as a result of its insignificance on the world stage. New ideas are embraced, and the ambitions of many desire to be tested against the rest of the world. New immigrants wanting to settle in are embraced in stark contrast with the US where new immigrants represent a drain on services.
The US is different in this regard. With 300 million people and only about 20% of the population holding passports, it's more insular in nature. There appears to be stresses in the system now that lead to zero-sum thinking that wealth comes at the expense of someone else’s loss. Just ask anyone who purchased a McMansion in 2006 about what it feels like to hold the proverbial “bag”. The corporate structure is one of scale and multinational exposure where as New Zealand is the land of the family business.
There was an event however, that stuck out in my mind as a moment of this contrast. Back in 2004 an American developer came out here to view real estate development prospects. After seeing so much unused coastal land he was quoted in the paper as saying New Zealand should get rid of those useless sheep and cattle, cut the hills flat and put in thousands of condos. Needless to say, I am certain this chap’s stay here was short lived, and he’s still wondering about how his permits got lost and his visa wasn’t renewed. Remember, 4 million people puts 2 degrees of separation between you and everybody else. It also means the charlatans and hucksters get run off.
Speaking of visas, there are several avenues you can use to enter New Zealand. English speaking and being resourceful are your major requirements. The basic premise behind the immigration policy here is one of attempting to add benefit to the economy either through your skill set, small business start up, or passive investor. Required in each of these applications is a police report and medical exam. The medical is more about being a burden on the healthcare system, than anything else so don’t worry if your elbows are on backwards. The easiest way to understand the viability of an emigration is to visit the New Zealand Immigration website. Suffice it to say, it is not a lottery based system but one that has clearly defined guidelines.
All views expressed are those of the author,
Michael Reps, Director
www.Yieldqwest.co.nz

Thank you, Michael, for your first-hand report on a topic many may be considering quite seriously as the U.S. economy and society deteriorates.

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Washing Machines, Free and New

noreply@blogger.com (Charles Hugh Smith) — Fri, 10 Jul 2009 16:32:00 +0000

A discussion of washing machines ends up touching on all sorts of issues: quality, efficiency and the abundance of free goods in the U.S.

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Readers checked in with some cogent comments on washing machines which reflect key issues in an economy of tightening money and resources. If you really don't have much spare money or credit, or are just thrifty and need what money you have for other projects, then as noted below an amazing array of goodies are available for free or for very modest sums.

Buying new appliances has one major payoff--much higher efficiency. A "life-cycle" analysis of any device which uses power and water (inputs which cost money) calculates the total savings gained over older less efficient models, which can be quite substantial. But such an analysis should also recognize the energy and material cost of manufacturing the item. An old item which lasts a long time has a lower life-cycle cost than one which breaks down in a year and must be replaced (especially if it cannot be readily repaired.)

This is the ultimate problem with cheap furniture from Ikea and poor-quality stuff from Home Cheapo: it may look nice for a few months before it rusts/pulls apart/breaks, but once it goes to the landfill it's true life-cycle costs were very high: non-renewable resources were invested in an object which had a short-lifespan of actual utility. Maybe the price tag indicated it was "cheap," but how cheap was it when compared to a more costly higher-quality item which lasts five, ten or fifty times longer?

Then there's the issue of repair. Older appliances, autos, lawn mowers, real wood furniture, etc. are typically repairable. Not so many new machines with electronics which fail. The entire device is always dependent on the weakest component. If that component is prone to fail and costly/impossible to replace, then the lifespan of that machine will very likely be far shorter than that of an older, better engineered and better-made equivalent.

How many times have you heard this story? The electronic board on a car goes out and the replacement costs $800 or even $1,200. How much is the car worth? Maybe not much more than the replacement cost of the electronics parts. So the entire vehicle is junked.

Ikea-type particle board furniture looks very nice when first assembled, but once the screws pull out of the particle board then it's impossible to fix without going to a great deal of trouble. Once the super-thin veneer peels off, revealing the particle board underneath, the once-chic item is quickly reduced to shabby junk--perhaps its "natural state" given the poor quality of the materials used in its construction.

These three reader comments each address these issues from a different perspective:

K.K.

Soon after I moved in to my condo (with a laundry room) in SF back in 1998 a friend bought a home in Mill Valley that still had the original "avocado" green Maytag washer and dryer that the original owners of the home bought in 1968.
My friend and his wife bought a fancy ~$1,000 Bosch washer and dryer and gave me the green Maytag washer and dryer for free. A couple years later the dryer stopped getting hot so I slid it out of the laundry room in to my living room (thinking of the comedian who says "If you have ever had a major appliance disassembled in your living room than you might be a redneck") took it apart an replaced the thermostat (for under $6).
The green Maytags were working great when the same friend asked if I wanted to buy his $1,000 Bosch pair for $200 since now that they had kids they were buying a bigger ~$1,500 Maytag "Neptune" combo. I bought the Bosch washer and dryer and gave the old green Maytags away on Craig's List (I had a guy give me a sob story that he lost his job and his wife was pregnant so I gave him the washer and dryer for free).
The fancy front loading Bosch washer and dryer did not get my clothes any cleaner and ended up making my life harder since the super fast spin cycle (to spin out more water and reduce drying time and energy use) set the wrinkles in my clothes and the front loader locks preventing you from tossing in the sock that you spotted on the ground after the cycle stops. The most annoying "feature" was an auto turnoff (again to make the Euro Greens happy) that prevents you from getting things super dry (and makes you leave damp towels hanging around the apartment).
I sold the Bosch washer and dryer for $200 when I moved to Davis and I bought the cheapest GE washer and dryer combo at Lowes (with a 20% off coupon) for just under $600 out the door and they work great. I can't imagine that my clothes would be much cleaner (or dryer) if I paid $1,000 more for a fancy washer dryer set.

Kevin G.

Regarding the replacement of washers and dryers: My family returned from vacation (celebrating our twentieth wedding anniversary, thank you very much!) to discover that our 14-year-old washer was broken (again). We'd known that both it and our 20-year old dryer were not long for this world, so we were already prepared to replace them at the next breakdown.
We chose to spend about $1500 on a new set of high efficiency appliances from GE. They were delivered yesterday, hooked up (no extra charge) and the old ones removed (no extra charge -- and hopefully heading for recycling). My hope is that these, too, will provide us with many, many years of service. A bit expensive? Perhaps -- or perhaps not.
The old model had a giant drum that filled up two three times with water. How much water was that per filling? 20 gallons? 30? However much it was, it was clearly a lot. The new one sips water. I suspect it takes closer to 10 gallons to do the entire load (not just a single cycle). Likewise, the old one was an energy guzzler, where the Energy Guide on the new washer estimates that it will cost us about $11 per year for electricity and gas. Finally, it's high speed spin cycle leaves the clothes more damp than wet, so drying times (and energy consumption) are cut dramatically as well.
So where am I going with all this? I suspect we'll be able to cut our monthly water bill by $10 to $15 per month and our energy costs by $30 per year (guessing big time on that one) due to the new washer. Yearly, let's just call the savings $30 + ($12.50*12) = $180. $800 for the washer divided by $180 = 4.44 years. That's the time the unit needs until it pays for itself completely in energy and water savings. In other words, if the machine last a mere 4 1/2 years it will be essentially FREE to us.
In any case, I just wanted to present you with a different take on the cost and benefits of buying a new washer. I could do a similar analysis on the dryer, but really don't have a clue what the difference in energy consumption between old an new is except that I'm sure it is substantial.

Tree Hugger

Free stuff does exist. It is a little section of Craigslist. That good used washer from Wednesday's entry is easy to replace for the cost of a little time and effort. By watching the ads and answering in a nice and polite form there are probably several chances a week at a good working replacement for the cost of picking it up. When my wife and I moved from Texas to north Virginia, we gave away most of our big furniture and misc. items. We condensed our things to one car and one small-bed Ranger. Later when we had a 3 bedroom place for a while, every room was nicely furnished with free stuff. We got TV's, beds, couches, tables, chairs, a portable convection oven I adore, and dishes, etc.
The cost of moving alone would have been enormous, had we rented a U-Haul, much more still if we paid a moving company like many people do. There would be additional storage costs if a smaller place was chosen. The expensive moving fees are well known by the general population. If people don't give it away they have moving sales. One way or another there is always going to be plenty of stuff available at a fraction of the cost, or dare I say it, Free! (like a scavenger hunt)

Thank you, readers, for your commentaries.

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After the Fall: Agenda Points for Renewing America

noreply@blogger.com (Charles Hugh Smith) — Thu, 09 Jul 2009 13:30:00 +0000

"Agenda" sounds like blah-blah-blah, but we have to start somewhere.

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If you assume (as I do) insolvency of the Federal, state and local governments in the U.S. is only a matter of time, then the question becomes: what do we do after the Fall? Just as rough-and-tumble start, here is a short agenda of points to cover:

1. In the big picture, the differences between the Democratic and Republican parties are trivial. Consider:
A. Each stood by while the banking/securities/mortgage industries looted the nation. Neither supported criminal investigations, both support the "too big to fail" ideal.
B. Each has enabled and supported the cartels which exploit and impoverish the citizenry: banking, "healthcare," et al.
C. Each is in thrall to special interests who lavish tens of millions on their campaigns.
D. Each supports a version of the "Savior State" which seeks to save everyone from themselves; "personal responsibility" is an empty phrase unless you don't have a good trial attorney.
E. Each has added trillions of dollars to the national debt, impoverishing future generations should interest rates rise (which they will); each has stood by as $600 billion current account deficits destroy the dollar's value when priced in gold.
F. Each allows graft, greed, corruption, embezzlement and cheating on a vast scale; to the taxpayers, the $200 Pentagon hammer and welfare fraud are essentially equivalent.
G. Each has supported Imperial over-reach as the fundamental foreign policy of the nation.
H. Each hides behind the other as an excuse for why "compromise" waters down "reforms" to just another layer of complexity on an already overly complex system.
I. Each assumes minor policy tweaks (you will now pay $10 more for your Medicare coverage, we're raising the CAFE standards a few miles per gallon, etc.) will miraculously (eventually, we're told) solve deep, structural problems.

In sum, the supposedly vast "partisan" differences between the two status quo parties are 1) fund-raising gimmicks and 2) good entertainment for the "news" (entertainment/circus) media.

I know, I know, this is the status quo and it can't be changed except glacially. Until, of course, the glacier melts.

2. Cheap abundant oil is almost gone. We have 400 years of coal, blah blah blah. Great. Try shoveling it into your car and that 747 aircraft awaiting refueling, etc. Gasify it? Fine, but it won't cost $2.50 a gallon. And please show me the plants which will gasify 20 million gallons of gasoline a day plus millions more of jet fuel, diesel and other distillates. And also show me the rail lines which snake from the coal fields to these wonderful gasification plants.

Clean coal? Nice, but it's not cheap. We have nuclear energy, blah blah blah. Yeah, and Peak Uranium, too. Breeder reactors--maybe. There's something like two in existence. And they make electricity, not jet fuel. So plug the electrical recharger cord in that 747 aircraft and hope somebody discovers super-light cheap batteries which have energy densities equivalent to jet fuel.

And just remember all existing alternative energy sources supply about 3% of global energy consumption.

3. Complacency and fatalism are both traps. Either people blissfully assume some magical "American can-do" will appear and save us from actually having to change anything or they've given up, passively awaiting their fate. Neither is a constructive approach.

4. "Healthcare" is as broken as a body that fell from the Empire State building. The cartels which profit from the current Kafka-esque nightmare of "the world's finest healthcare system" (George Orwell, where are you now that we need an update to 1984?) have a chokehold on the Demopublicans and thus on the pursestrings of the cash-cow government. They will only loosen their grip on the cash-cow when it groans, teeters briefly and then flops to the earth, insolvent and no long able to pay off the cartels.

Instead of looking at other First World "healthcare delivery systems" which are also heading for insolvency, we might benefit from examining how Third World countries supply care to their citizens. That will be more in line with our budget.

5. The U.S. gets $600 billion a year from our hapless trading partners (via the current account deficit) and borrows another $2 trillion from anyone trusting enough to think interest rates will stay low forever. A great cheer arose when it was discovered the profligate U.S. consumer mended his/her ways and started saving again, at the stupendous rate of $680 billion a year.

Oops, except the government includes money allotted to paying off debt in that "savings" number. So maybe Americans are actually stashing much less, say $300 billion a year. But then they're still saving huge sums of money in their 401Ks and IRAs, right? You do mean, of course, all those retirement plans which cash-strapped folks have stopped paying into... but never mind the millions who are jobless, let's reckon another $700 billion is flowing into the coffers of retirement accounts.

Great. That means if every dollar saved in the U.S. was (foolishly) invested in U.S. Treasury bonds, we'd only have to borrow a mere $1 trillion from overseas governments, central banks and investors. Wow, who knew it could be so easy to fund $2 trillion a year in deficit spending?

OK, so governments are pouring billions into the public-employee pensions, and life insurance companies are investing in America, etc. etc. so let's add another $500 billion into the savings pot, increasing it to $1.5 trillion (that's being generous to the point of unreality, but let's assume the best).

But realistically, will every dollar actually be invested in a T-bill? So maybe at best some $750 billion (of the total $1.5 trillion) would flow into Treasuries to fund the deficit. That still leaves a $1.25 trillion sum which must be borrowed overseas.

And let's not forget that these poor trading partners are getting $600 billion a year in paper money we give them for the oil, manufactured goods and commodities (i.e. actual real stuff, not paper money) they ship us. That's supposedly "good" because they're forced to recycle all that paper into Treasuries, but perhaps we should wonder if they're tiring of that scam and may want to buy something tangible themselves with that $600 billion a year.

Just a thought.

6. A funny thing happened on the way to unlimited alternative energy. Costs went up throughout the economy. That battery-powered tractor sure is neato, and so is that solar array to power it. But those gizmos weren't exactly free. Neither are the battery-powered trucks to haul the produce to market and bring in the organic fertilizer (itself more costly than the old chemical nitrogen), etc.

It turns out that when cheap oil is gone, so is cheap anything.

That limits what we can do with all the above situations because a terribly ironic paradox comes into play here: just as we need to invest trillions of dollars in creating alternative sources of energy (and ramp up energy conservation), we have to spend ever-larger sums on fossil fuels and interest payments on all that debt we took on keeping the status quo unchanged.

Try not to laugh too hard at the irony. Your healthcare insurance might not cover that condition and you'll have to pay in cash.

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Lagniappe thought on the stock market: You know the drill here--this is not investment advice, it's just the wandering musings of an amateur (please read the HUGE GIANT BIG FAT DISCLAIMER below very carefully).

Now that everyone else is a Bear, too, I'm getting nervous. When the most popular story on Marketwatch is a clarion call to go short/sell because the neckline in a head and shoulders pattern has been broken, I got the urge to go long (and I did, all in today in calls and 2X long ETFs). I'm seeing 10 puts for every call in some ETFs--that means the vast majority of players are betting on a big downturn.

We all know the U.S. economy is in dire straits, and is basically terminally over its head in debt, deficits and unfunded liabilities. But as often noted here, the stock market (contrary to popular opinion) has no connection to the real economy.

A real Bull market likes to crawl up a "wall of worry"--that is, a reserve of Bearish worries, and a Bear market likes to chew through reserves of Bullish hope (the so-called slope of hope). Now that everyone has their eyeballs glued to the broken neckline, and placed their bets via a lopsided put-call ratio on a big downturn, there's basically no Bulls left standing--I mean legitimate analysts, not cheerleaders who are always bullish.

Legendary trader Jesse Livermore observed that the market takes along the fewest possible participants on every profitable ride. When punters have snapped up 10 puts (bets the market will plummet) for every call (bet the market will rise), well, it just doesn't seem likely that the market will reward the 10 and take the money from the one. In every instance I can recall with such lopsided put-call bets, the market takes the money from the 10 and rewards the one contrarian.

Maybe this time it will be different and the herd will reap vast profits. Maybe, but I'm off to the side on this one, watching the herd run headlong into the unknown. Maybe it's about to enter a field of easy gold (i.e. the market crashes, rewarding the herd) or maybe it will run off a cliff (i.e. the market shoots up, wiping out the bearish bets).

We'll see who's right, the millions who are betting on that broken neckline (blah blah blah) or Jesse L. (posted 9 pm PST 7/8/09, so the open of the market on 7/9 is unknown to me.)

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Frugality, "New" and Traditional

noreply@blogger.com (Charles Hugh Smith) — Wed, 08 Jul 2009 15:24:00 +0000

"The New Frugality" is getting airplay. Correspondent Dan K. shares his experience in replacing an old broken washing machine.

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Correspondent Dan K. addresses the "new frugality" as he sets out to replace his fritzed washing machine:

Have you looked at the cost of a washer/dryer set lately?
It's Sunday afternoon and the washer is on the fritz. Yeah, it's been having 'issues' for a few years now. First the stupid little tab that is supposed to lock the front-loading door broke off. Who designed that piece of garbage? If you are going to put something on a door that can be hooked and broken off by clothes while loading, at least make it of Delrin or some similar high impact, less breakable plastic. But whatever, we found the door would still stay shut without it so I guess it wasn't all THAT important. After a while the little buzzer that told you the door was not locked died, so it was almost as if it had been designed that way to begin with...
Then the door started to sag. What's up with that? It doesn't weigh much, and the kids certainly haven't been hanging off it. Lord knows the kids wouldn't go NEAR the washer for fear of being put to work in the laundry room.. I mean, can't the manufacturer figure out a way for what looks like a 6-8 lb. door to stay true for 6-8 years? But whatever (again), the thing still seemed to work if you just made sure to push the door closed all the way.
Not long after the the door started to sag, the knob came off. Not one of those simple affairs, this is the kind that acts as a switch. Push in to disconnect the circuit, pull out to start the machine. That made things a bit more interesting, but we worked around it by grabbing the still attached plastic collar and using that to set the cycles. Of course the machine was always in the 'on' mode, but so long as you kept the door open when you chose your cycle, it all seemed to work out fine (sorta). At least you wouldn't hear the machine chunking and grinding to keep up with your hand-spin of the perpetually 'on' settings wheel. Some engineer must have recieved an award for the design of this partiular wheel, with the company knowing it would sell a fortune in replacements some years down the line.
But it didn;t stop there. After several years, the no-longer-locking-and-now-sagging door stopped tripping some sort of internal safety that would tell the washer the door was closed and it was time to get to work. Maybe the thing was just tired and didn't want to work so hard anymore, so like HAL in 2001: A Space Odyssey it fried it's own internals. Who knows. BUT, we outsmatrted the thing by using a chunk of PVC tube to put a brace against the door when closed. It gave the door that little bit of extra closure to re-engage the switch and allow the washer to work again. Really, all you had to do was peek into the laundry room and you'd see that lovely three feet of plastic pipe wedged between the washer door and the closet door opposite to know the machine was still full of sopping wet clothes.
Oh, did I forget to mention that the machine seemed to have stopped draining? Yup, it appeared to think once it had run a wash and rinse cycle it was too tired to pump itself out anymore. For a while I would run it thru the spin cycle to get it to pump twice each load and get the clothes at least marginally wrung before they headed off to the dryer that squeaks when it spins. Howeven, I think the washer finally got my number and stopped pumping much of anything as of yesterday.
Well, after all the 'fun times' we have spent together, I am getting the hint that maybe our washer is looking into retirement before all the Social Security money is gone. It has reached the ripe old age of 8 years now, which, having worked like a dog, in dog years would make it somewhere in it's late 50's -- maybe a little young for retirement, but like it's owners certainly getting a little longer in the tooth. So when the spousal unit said "Time to get a new washer", I figured "why not?". Sure we would miss the missing knob, and the plastic pipe would also be retired. And no more sagging door, we could get a hot new model not in need fo a 'face lift' and some 'internal surgery' to keep it healthy.
Hello CraigsList!
Having haunted the aisles of Home Depot for years, ever in search of the copper plumbing fitting, the sheets of drywall, nails for the nailgun, etc. I knew laundry appliances had certainly gone through a facelift in recent years. It was hard to miss the 'designer colors' and the fact they were growing taller like my children. Yet, as sleek as they looked, they never really garnered any attention from me as our trusty ol' washer at home still worked fine -- plastic pipe and all. So why look at a new model? I wasn't going to throw my wife away for getting older, why do the same to my washer? We had 'history' together. Now it looked like our time had come to split up and there was no turning back.
So here I am, letting my fingers do the walking on the 'Net. Did you know you can get matching sets in red,white, and blue (how American -- even if they say LG on the front) as well as green, black and who knows what else. Did you know those 'designer' washer/dryer sets start around $1500 for a 'good" set? WOW. So that got me to thinking...
Does anyone really know, or for that matter care, if my clothes got washed by a $1800 set of laundry machines? Would the neighbors ask me, the man of 'plastic pipe' ingenuity to move if I brought home a new washer (no matching set -- GASP!) that didn't look like it stepped off the pages of Architectural Digest? Would I have to sneak it in at night under cover? Would my clothes tell the other clothes they ran into on the street they had been shaped up at the discount wash center off the kitchen? Or was I just being paranoid about all this?
Then I remembered -- this is the 'newfound age of frugality'! It's cool to be cheap! Saving money is 'in' again, even if it had never been 'out' in our household.
I think I'll see what kind of deal I can get off Craigslist. I am sure someone went a little 'charge-happy' in the last year or two. And the best part is that in today's economy, I can even feel proud of the 'deal' I will get on that "Like New, year old washer" being sold because someone is moving or downsizing. Now if only I could get a new back, and a few joints the same way...

Thank you, Dan. Great writing on a topic every household can relate to. After suffering for years with the recalcitrant ancient washer given to us by elderly neighbors, we broke down (yes, I am ashamed to admit, I bought something new) about five years ago and bought a basic Sears Kenmore front-loader when we received one of those "$75 off your next major purchase" mailers. In my defense, that is the only major item we've bought new in the past five years except cheap Hewlett-Packard PCs and a Samsung TV from Costco to replace ancient models which expired.

Recent items picked up for free off the curb: almost-new 3-gallon propane tank, empty but still valuable, and a large suitcase (with broken pocket zipper, otherwise OK) filled with clean bedding of various sheet sizes.

The flood of slightly used goods available for free or a few dollars is just beginning...

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Junk Fee Revolution: Government Is an Enterprise, Too

noreply@blogger.com (Charles Hugh Smith) — Tue, 07 Jul 2009 15:06:00 +0000

As local governments face revenue shortfalls and the consequences of their hiring/wage-benefit largesse of the past decade, they are squeezing the private sector and non-Elite citizenry with huge increases in junk fees.

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Frequent contributor Cheryl A. recently sent in some examples of the sudden proliferation of local-government junk fees and gigantic increases in existing fees. One, an inactive professional license suddenly requires a $70 annual fee to remain inactive (now that's creative--you have to pay to not make any money) and the West Virginia turnpike tolls just leaped from $1.25 to $2.00.

Here in my neck of the woods, our municipal water agency just jacked rates by 8% and BART (regional subway) also just raised their ticket prices again for the second time in three years. (Could it have anything to do with the 24% raises they handed to employees three years ago? Hmm.)

Here's the context: in the bogus "prosperity" of the dot-con era (Internet bubble) and the housing bubble (roughly 1996-2008), local governments hired huge numbers of new employees, far outstripping population growth, and then raised already- generous benefits and wages packages to levels which no private-sector employee could possibly match.

Examples are endless: work five years, get lifetime healthcare coverage. (UCSF and city of San Francisco.) Please find even one private-sector employer which offers that benefit.

Here's another: work half-time for seven years, qualify for a lifetime pension which pays you starting at age 55. (City of Berkeley library.) Please locate even one private-sector employer which offers that benefit.

Local government and its employees are in denial of a simple fact: government is an enterprise which must, like any other, align expenses with revenues. Like a ratchet, local government and its employees seem to believe that increases in wages and benefits are "rights" which can only go up, regardless of the finances of the enterprise (local government).

Is this prudent or even common-sensical? Clearly, it is not. In every enterprise, huge boosts in benefits offered during "prosperity" are subsequently axed to match revenues when revenues plummet. This is especially true in enterprises (like government) in which 70% of all expenses are employee-related.

Local government is attempting to avoid draconian cuts in skyrocketing compensation costs (check out those healthcare and pension costs) by slapping high junk fees on a citizenry struggling to survive. Cheryl sent in the following stories as examples:

Tourists pay price as states jack up taxes to balance budgets:

Taxes on travel are soaring as states and cities target the wallets of tourists and business travelers for new revenue. Hotel taxes, car rental fees and other charges were jacked up in many states in an effort to balance budgets by last week, when the fiscal year started in 46 states.
Popular tourist destinations were hit especially hard. Among places where taxes rose:
•Hawaii. The hotel room tax increased from 7.25% to 8.25% on Wednesday and will rise to 9.25% in July 2010.
•Nevada. The room tax will increase up to 3 percentage points, to a maximum of 12%. In Las Vegas, the hotel tax jumps from 9% to 12%. Reno's tax was already 12% and is not scheduled to change.
•New Hampshire. The tax on rooms and restaurant meals rose from 8% to 9% and was extended to include recreational vehicles at campgrounds.
•Massachusetts. Cities were given authority to raise the hotel tax from 4% to 6%, in addition to the state tax of 5.7%. Taxes on eating out will rise from 5% to 6.25% statewide, plus another 0.75% if cities choose.
•New York City. The city, which raised its hotel tax March 1 to 14.25%, not counting other fees, will start charging more for Internet reservations.
"You couldn't pick a worse time to make it more expensive to rent a hotel room," says Mark Woodworth, executive vice president of PKF Hospitality Research in Atlanta. Hotel occupancy this year will be at its lowest level — 55.5% — since his company started keeping track in 1936, Woodworth says.

Cities, states tack on more user fees

State and local governments are turning to user fees to raise quick cash — from increases on hunting licenses to fees for enrolling in the Little League. One town is considering charging accident victims who need to be extricated from their cars. As cities and states struggle with sinking property values and declining sales tax revenue, many see raising fees as more acceptable to voters than increasing income taxes and sales taxes, said Bert Waisanen, a fiscal analyst for the National Conference of State Legislatures.
Money from the federal stimulus package will bolster some parts of states' budgets, but it won't be enough to close the gaps, said Scott Pattison, executive director of the National Association of State Budget Officers. "The stimulus favors education and health care," Pattison said. "Other parts of the budget are going to be disproportionately hit, like parks and recreation."
Colorado lawmakers, who cannot raise taxes without a statewide vote, this month raised fees for car registrations and rental cars to help meet a $600 million shortfall.
"There has been a blizzard of fees," said Colorado Senate Minority Leader Josh Penry, a Republican who favors cutting the budget instead of raising revenue. "The state is balancing its budget by knocking the budgets of families … out of balance."
House Speaker Terrance Carroll, a Democrat, said the state already has cut $300 million from the budget. "The common good requires certain sacrifice," he said. "The vast majority of people understand why it's important."

Seven Questions for Mr. Carroll:

1. How much did Colorado state legislators cut from their own salaries, medical benefits, retirement benefits, per diem expenses, state vehicles provided, staff expenses, and all other forms of reimbursement and compensation?

I suspect the answer, if total compensation and bennies are used as the baseline, is between 0% and 5%.

2. How many employees did the State of Colorado add in the years 1999 - 2008? What was the percentage increase, compared to the increase in state population?

I suspect the answer will be employees were added at twice the rate of actual population increase. Thus a 3% rise in population, 6% more state employees, etc.

3. Starting with total compensation (salaries plus total benefits value), what is the average pay cut imposed on state employees?

4. How much did total compensation (especially pension benefits/contributions) paid to state employees rise in the period 1999-2008? How does this increase compare to the inflation rate in the same time frame?

I suspect the answer, if total compensation and bennies are used as the baseline, is that total compensation increased at twice the rate of inflation.

5. How much, in dollars and as a percentage of total state tax revenues in 1999, did tax revenues rise in the period 1999-2008? How does that compare to inflation in that period?

Surprise: I suspect the answer, if total tax and fees revenues are used as the baseline, is that taxes/fees revenues rose at twice the rate of inflation, thus inflation rose a total of 20% and total taxes rose 40% above the total collected in 1999.

6. If government is an enterprise with revenues and expenses like any other, then why shouldn't expenses be cut by 30% to match a 30% decline in revenues? Exactly what exempts government employees, contractors and recipients of benefits from the notion that when revenues fall, then expenses must be trimmed in parallel fashion?

Thus if local government added large numbers of employees during "prosperity" then the number of employees should be pared back to what it was before "prosperity."

If government employees were granted raises in wages and benefits during "prosperity" (in quotations because it was always a visibly bogus prosperity based on debt and irresponsible lending/spending) then as revenues fall by 30%, so too should employee compensation be trimmed by an equal percentage.

I am occasionally accused of union-bashing or public-employee bashing whenever I point out what can be easily verified: that private employees have on average been losing ground for decades, while public employees (at least in California) have been granted huge increases in total compensation--the cost of their healthcare and pension benefits are ballooning at guaranteed-to-bankrupt rates.

This is all easily verifiable. In my city of residence, city contributions to employee pensions leaped from $2.8 million to $15 million in the span of two years: Scale Invariance: Is Your Neighborhood Sliding into Recession? (February 6, 2007)

In fiscal year 2005, $15 million of Berkeley’s $115 million general fund will pay for contributions to the California Public Employees System (PERS). Last year, the city spent $8 million on retirement benefits. The year before, the city spent only $2.8 million.
A lot of that money is going to cover stock market losses, but a good chunk will pay for improved pension benefits to Berkeley’s growing ranks of retirees who threaten to strangle the city’s general fund for the foreseeable future.
“Basically they’ve given away the store,” said Ron Roach of the California Taxpayers Association, one of the few groups to oppose the higher pension plan. For local police and firefighters the bill meant they could now retire at age 50 with a pension that equaled three percent times their years of service—75 percent of his or her highest yearly salary, for instance, for an officer who retires at age 50 after spending 25 years on the force. Subsequently the state passed a law allowing police and firefighters to receive a pension as high as 90 percent of their highest annual salary. (source: Berkeley Daily Planet)

What's Different Now (July 12, 2007)

And please don't tell me how underpaid everyone is; there are plenty of schoolteachers and police officers in my extended family, and $65,000 for 9 months work is not underpaid. Low-skill clerks at UCSF (University of California at San Francisco) make $45,000 a year; that's also not "low paid." They get their medical benefits for life after a mere 5 years of employment, as do all employees of the City of San Francisco.
Uh, can you spell "government bankruptcy"?

7. How do you think the citizenry feels when parking meter fines jump to $35 or more, and other parking fines (parking even for a minute in a no-parking zones, double-parking for a few minutes to answer a phone call, etc.) jump to over $50, while minor moving violations (not coming to a complete stop at a deserted intersection, being 6 MPH over the speed limit, etc.) cost hundreds of dollars? Do you believe they feel this is "democracy in action" and "necessary sacrifice" or simply extortion to protect your gargantuan pension?

How do you think they feel as the debt/layoffs noose tightens around their neck to get a $35 parking ticket, a $15 "fee" to enter a county/state park, $150 for the planning/building department to glance at their plans, never mind if the department actually issues the citizen a permit--that costs thousands of dollars more--on top of the property taxes, sales taxes, phone taxes, internet access taxes and income taxes they already pay local government? Do you really think the "sacrifice" of paying junk fees on top of all the other taxes endears the citizenry to your immense healthcare benefits and staggeringly costly pension benefits?

In Survival+: Structuring Prosperity for Yourself and the Nation, I posit the emergence of a "high-caste" class of public employees and corporate technocrats who are protected by their service to the State/Plutocracy (two sides of the same coin).

Like any Elite, local government is protecting its own income via extortion (pay or you don't get any service) and by nickel-and-diming "the little people," i.e. all of us who are not protected by membership in the "upper caste."

What the upper caste and local government politicos don't yet grasp is the rage their extortion racket will unleash. I have gone on record predicting that the junk-fee game will absolutely backfire on local government, which will find its revenues plummeting even faster than expected.

Here is another simple fact to consider: we don't have to opt into any service but water and electricity. Yes, you can increase the junk fees on those and we will have to pay the extortion, but as for the rest:

1. Raise hotel tax: stay with relatives, camp or don't travel.

2. Raise turnpike fees: choose backroad alternative routes.

3. Raise subway fares: Share rides, carpool, bicycle, stop going to events in the city.

4. Raise sales tax: buy stuff at swap meets, garage sales, barter, trade.

5. Raise fishing license: fish on private lakes or stop fishing.

6. Raise rental car fees: slash employee travel to zero, teleconference; borrow relatives' car, take the bus, don't travel.

7. Raise fee for inactive license: cancel license, exit the profession, close down your side business (it's not making money anyway).

8. Raise parking meter fines to $40: stop shopping in that city. Refuse to go there for any reason.

And so on. It's called "opting out." If you don't think it's already happening, you're not paying attention.

I can only hope that voters will awaken and vote out every incumbent of every party. Not that I have much hope of this, but it would be a start.

How will the revolution start? By opting out. By that I mean opting out of everything which is a rip-off: private university fees, pro sports "seat licenses" and all the rest, all the way down the line to fishing licenses. Some will opt out by choice, some by way of protest, and others because they no longer have the money to pay the fees and ticket prices.

Lagniappe thought: As the inflation/deflation debate rages unabated, perhaps it would be instructive to turn to a simpler question: the cost of living as measured in purchasing power of our currency (in the U.S., the dollar, but the question is equally valid for the Aussie dollar, the Canadian dollar, the euro, the pound, the RMB, the yen, etc.)

If we consider the cumulative costs of junk fees, extortionate increases in fees, licenses, sales taxes, etc., then we have to conclude that these increases substantially increase the cost of living for non-Elites. This is how the cost of living can rise even in macro-deflationary times.

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Patents, Complexity, Marginal Returns: Hello, Devolution

noreply@blogger.com (Charles Hugh Smith) — Mon, 06 Jul 2009 14:29:00 +0000

Increasing layers of complexity act as a hidden tax on the economy. As costs rise and returns become increasingly marginal, the system collapses or devolves.

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Frequent contributor Michael Goodfellow and I have been discussing innovation and patents, and it seems clear U.S. patent law is another example of why the U.S. economy and government are about to undergo devolution.

Take any working system and then add layer upon layer of additional complexity--all in the name of "fixing" or "reforming" it. There are thousands of examples of this process in the U.S. economy, but let's take patent law because it's hidden from most people's view even as it influences economy-wide business decisions and costs.

As the costs and liabilities of the patent process rise (including, of course, defending one's enterprise from flagrantly spurious lawsuits and what amounts to extortion), then the costs of doing business in the U.S. also rise--with zero additional benefit to offset the expense. As the legal costs of defending and obtaining patents increase, the system doesn't get more efficient or fair; if anything, it gets slower and less fair.

In this way, the entire infrastructure of patent law acts as an economy-wide tax. The same can be said of healthcare, public employee benefits, and many other entrenched systems with runaway costs. The end result is a high-cost economy which cannot be reformed due to the immense political power of those benefitting from the overly complex, ever-higher-costs, ever-lower-returns system.

As the benefits resulting from the system diminish and its costs keep rising, then the only choice left to those not in the parasitic Elites being enriched by the Status Quo is to opt out, sell out, go underground or move one's enterprise offshore. That is devolution writ large.

I think you'll find Michael's commentary very interesting, as it explains how the present U.S. patent system is actually stalling/hindering innovation:

I think you need to compare the time to develop a product vs. the time to reverse engineer it, and the sales lifetime of the product. Then be aware that copyright and patent are two very different things. I'm all in favor of limited copyright, but patents are already a big negative, and getting worse.
If you have something like a cute t-shirt design that can be copied instantly, you are right that without copyright protection, you aren't going to be able to hold your market. The price will drop to manufacturing cost, and you'll lose out to the knockoffs. If copyrights are enforced, you might have a chance. Still, if your shirt is a cute kitten with a slogan, someone else can use a different kitten picture and a similar slogan, and never violate copyright. Stuff like that is just a very opportunistic market. It's really all about marketing and supply chain (for all the shirts), not about content.
If it's a fashion item, there's a more substantial reverse engineering, and a longer production cycle, so the original would have the market to itself for longer. Also, since fashion dates quickly, the useful lifetime of the product is shorter. So it's not clear to me that the knockoff could really capture a huge percentage of the market. The original producer can also drop prices as the item ages in the market, and keep down the amount of revenue that the knockoff can capture.
For something like the iPhone, the reverse engineering time is more substantial. You have to do a similar ID, write similar software, get prototypes debugged, etc. The iPhone has a lot of appeal due to its links to the App store and to iTunes, which Apple controls, and which depend on the device running the Apple OS. So it's going to be very hard for a knockoff to compete with it. Without patent protection, you'd see more of that kind of thing -- links to internet services controlled by the manufacturer. Other products like printers that know to take only ink cartridges from the manufacturer, are similar protection-via-engineering, not patent.
For something like Microsoft Windows, copyright is more than sufficient. No other company could afford to develop a knockoff, and nothing but an exact knockoff would run all the Windows software. It's taken the Linux community years to finally get some Windows emulation software to run applications properly. High-end server software still won't run under those emulation packages, because the Microsoft API is just endless (and poorly documented, and squirrelly.)
Plus people forget the downside of patents. Not only do you have patent trolls extorting money out of companies, based on ridiculously broad patents (and just wait till China and India start playing THAT game...), but any patent litigation costs a fortune and takes years. I think the current estimate is over $1 million per litigant, and I read about cases that drag on for 5-10 years. That's a nightmare to a company on the receiving end of a lawsuit. And as TechDirt is at pains to point out, most patent suits never allege actual theft of an idea. It's almost universally independently developed, because the Patent Office will approve ridiculously trivial patents.
See this item, for example, of a patent you've definitely violated yourself: Infamous Niro JPEG Patent Smacked Down Again:
Since then the patent has been asserted against a wide range of organizations, including some resort in Florida and the Green Bay Packers. Niro appears to claim that any site using a JPEG image violates the patent. Not only that, but in cases where the patent has been asserted, Niro has been known to go for something of a sympathy play, by noting that the inventors (or the widow of one inventor) named on the patent are "old and feeble"
It's being slowly cleaned up by the courts, but if a guy like that had targeted you, you'd have had no alternative but to fold, since you can't afford even a trivial lawsuit.
And this one on patent protection money: Intuit Pays $120 Million 'Don't Sue Us' Tax To Intellectual Ventures:
While it hasn't sued anyone, Myhrvold has made clear that's always an option. The company has remained incredibly secret, but it has somehow convinced some big companies to pay hundreds of millions to Intellectual Ventures (IV). Due to the secrecy, the details aren't clear -- and some of the deals apparently are a mix of "licensing" and an equity investment. But, still, the numbers are stunning. The latest, as pointed out by Stephen Kinsella is that Intuit has apparently paid $120 million to IV. For what? The right not to get sued.
Think about that for a second. This is a pure dead weight net loss to society. It's $120 million that Intuit could have put towards further innovating, or to pay off investors via a dividend. Instead, it goes towards nothing productive, in terms of actually creating new products. It will now likely be used to buy up more patents so that IV can get similar black hole money grabs from other companies, as well. It's like a black hole where real innovation goes to die.
The bottom line for me is that the patent system does not scale. It sort of worked when patents only affected a small range of industries. They immediately became a problem in software and biotech. Even then, at least people sort of understood the rules of the game. There was a disincentive to really be aggressive with lawsuits, since you could be a victim of someone else's suit. But when that game goes multinational, and the Chinese are "just playing by the rules", it will become open warfare.
The realistic alternative to patents is trade secrets and employment agreements, with technical hacks such as encryption and DRM to prevent complete reverse engineering. I think that does scale, and though it will be annoying, won't have the bad effects on innovation that the current system has.
My own software efforts, for example, are almost certainly illegal. My proposed system covers so many areas of UI, software development, online gaming, etc., that it would be a miracle if it didn't violate someone's patent. Even if I cared about that, there's no way I could do it right. There are thousands of patents, each with dozens of claims, all written to be as obscure and general as they could get away with. Even if you reviewed them all, without being a lawyer, you'd have no idea what would really be a violation. And it would take years to do it right. Then if you did go to market anyway, secure in the knowledge that you'd done all you could to be legal, you could still get sued, and the costs would bankrupt you.
So my attitude is, if the rules have been changed to make it impossible for you to win, why play by the rules?

Exactly--thank you, Michael. The way I would envision devolution occurring in patent law is twofold: one, everything takes even longer to resolve, and thus the eventual ruling becomes ever more meaningless (a company could fold in 10 years waiting for a ruling or appeal), and two, enterprises will simply start ignoring the judgments and rulings as enforcement degrades.

Get sued by a patent troll? Do nothing. If the troll wins in court, Just declare bankruptcy (or simply shutter the business and move away) and start the same enterprise elsewhere overseas where U.S. courts have no jurisdiction and cross-legal claims are tied up in bureaucracy.

U.S. firms are relocating to Ireland and Switzerland to avoid unfair U.S. corporate taxes (your competitors may pay near-zero rates while you foolishly pay 35% U.S. tax rates--the highest in the world; how long can you survive that imbalance?) but there may be other reasons, too--such as dodging U.S.-based patent trolls.

When extortion passes for "playing by the rules" and gaming the system earns more than actually innovating (or working productively), then the game is rigged. The only companies able to defend spurious lawsuits (and there is no mechanism to throw out spurious suits--that's what the entire process is designed to eventually do, at stupendous expense) are ones throwing off billions of dollars in profits like pharmaceutical and tech giants (Apple and IBM).

I am not knowledgeable enough in patent law to recommend reforms; but I can state that any reform which just adds additional layers of complexity and thus cost is not a reform; it is merely furthering an increasingly onerous status quo tax on the remaining productive economy.

Yes, "the garage inventor" patent owner may occasionally win a big settlement from a multinational, but please show me the statistics which reveal this to be a common event. It sounds more like the PR spouted by patent trolls to mask their parasitic nature than an assertion based on court statistics.

Lagniappe thought: Everything, even patent law, is dependent on oil remaining $100 or less per barrel. When oil is $300/barrel, even the legal system will be revealed as unsustainable. Courts are funded by tax revenues, and as those collapse then the court system will necessarily devolve, too.

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Liberty and Liberation: Independence Day and Survival+

noreply@blogger.com (Charles Hugh Smith) — Sat, 04 Jul 2009 17:14:00 +0000

I am posting my eBook Survival+ on Independence Day for this reason: we need to liberate ourselves from failed models of debt-based bogus "prosperity" and consumerist "happiness" and face the coming national insolvency head-on.

HTML version: Survival+: Structuring Prosperity for Yourself and the Nation

PDF version (111 pages): Survival+

This eBook is copyrighted but it is available for free distribution and personal-use printing because the subject--understanding the insolvency and unsustainability of the U.S. economy--is important, and I don't want the price of a book to be an issue which inhibits the national discussion we so desperately need to begin.

I don't expect you to agree with everything in this book--my goal is simply to add to the national discussion. Some chapters have been published as entries here, so those will already be familiar to you. What's new is the attempt at what I term anintegrated understanding.

Given that I spent over 5 weeks this year away on family matters, this 74,000-word work has required an extraordinary effort, given I have also written some 150,000 words this year on the blog and another 50,000 in emails to readers and correspondents (rough guesses). So yes, there will be typos and errors which I will be working to resolve as time permits.

This is my attempt at a comprehensive analysis of how we got into the current Depression; solutions are implicit in the analysis, and I will be working to complete an outline of a "Plan B" sustainable/post-financial collapse economy now that the "Plan A" economy is imploding. That section will be published (along with the 74,000-word analysis posted here) in Spring 2010 by Feral House Publishing.

That printed book will cost some small sum of money, as the publisher and author need some modest compensation to continue on.

If you find this eBook worthy, I would be honored by your distribution of the work to your friends and colleagues, and by any link you might post to it on the Web. Thank you, readers, for your kind support and encouragement over the past six months I have devoted to this project. I could not have done it without your contributions of cash, research and critical thinking.

Here are the first pages of Survival+:

Introduction

Since launching my blog www.oftwominds.com in May 2005, nothing seemed more important than warning readers that the unsustainably leveraged credit-mad global financial system was poised to break down. Once the system finally crashed in late 2008, my goal switched to writing a practical guide for not just surviving the coming Great Transformation but prospering: a concept I called Survival+ (Plus). This requires liberating ourselves from failed models of credit expansion, resource depletion, financial looting and a counterfeit prosperity built entirely on debt.

I immediately ran into several great difficulties. Many others had foreseen the same calamity, and their focus narrowed on individual survival: relocating to a remote/sustainable spot and preparing for societal collapse by stockpiling self-defense and food.

While prudent and practical on a short-term timeline, this response struck me as incomplete on several levels. Most importantly, stockpiling six months' supplies would not sustain anyone through a 20-year Crisis and Transformation; their own Crisis was simply being delayed a relatively short time. In other words: "what happens in month seven"?

Secondly, many "survivalist" proponents focus on individual preparation, as if a single person or household can prosper without a stable, caring community for reciprocal support. This notion ran counter not just to my own experience but to all of human history. While I understood the desire to "opt out" and become an Isolationist--a solution to general turmoil which has roots going back to the dissolution of the Roman Empire and the Warring States era in ancient China--I felt a more practical, longer-term option to Isolationism should also be presented.

The second great difficulty is that individuals, households and communities exist in larger units: city-states, counties, nations and continents. Even if nation-states were to break apart, the world would remain tightly interconnected. Events, weather, shortages and surpluses in distant places would continue to impact us all. States (by which I mean all forms of government) will continue to extend control over resources and wealth.

Trade has been a key component of security and prosperity since the dawn of civilization. Long before fossil fuels dominated the global economy, land and sea trade in both goods and innovations bound Asia, the Mideast and Europe. Thus a retreat to isolated islands of self-sufficiency, while understandable and practical on one level, does not align with what history teaches us about prosperity. Prosperity ultimately depends on stable communities, surplus production and trade. These essentials have been largely ignored in analyses of the coming Great Transformation.

Thus our individual survival and prosperity are inextricably bound up in larger contexts: we cannot just ignore community, State and trade forces as if they will cease to exist. Even as they no longer function as they did in the past, it seems wise to influence the larger Transformation rather than view ourselves in an isolation which is ultimately misleading.

That is why I subtitled this book "Structuring Prosperity for Yourself and the Nation." To believe that we can prosper individually without regard for the actions of our fellow citizens and the State (government) is simply not practical. Yes, a handful of very rugged people have the experience required to live in the deepest remains of wilderness; but the wilderness cannot support more than a handful of people, and most of us do not have the requisite skills or ruggedness to survive that splendid isolation.

This, then, is a practical book for the rest of us.

As I organized the book, another great difficulty quickly arose. I realized that the way a problem is phrased implicitly stakes out the eventual solution. As a result, the greatest challenge in understanding our plight, both as individuals and communities, is essentially conceptual. The forces which benefit most from the status quo are pouring all their prodigious resources into framing the "problems" in such a way that the "obvious solutions" leave their own power, influence and wealth intact.

Lest you wonder how this works, recall that all through the initial phase of the financial crisis in 2008, the mainstream media and standard-issue financial punditry (SIFP) blamed the entire crisis on foolish low-income homebuyers who had chosen to finance their purchases with subprime mortgages.

Framed in this way, the "problem" appeared to be caused by credulous citizens in the lower socio-economic levels. The "solution" was thus to eliminate these people from the pool of potential homebuyers, and auction off their foreclosed homes to worthier buyers.

But subsequent events revealed this framing of the problem to be highly selective: the "problem" extended far beyond feckless subprime borrowers into the top rungs of American Capitalism: the money-center and investment banks, and a politically driven absence of oversight by the very governmental agencies tasked with protecting the public.

The status quo's convenient "framing of the problem" insured that any "solutions" would leave their power, wealth and influence entirely intact; only the impoverished subprimers would suffer, not those who profited so immensely from the housing/credit bubble.

It was thus clear that a practical analysis of the crisis and coming Transformation requires a deep understanding of how "solutions" are set in the framing of the "problem." Indeed, what is "obvious" must be questioned on the deepest levels, for what is "obvious" has two powerful characteristics: it can be managed/manipulated via the mass media, and it directs "solutions" which leave the rentier-financial Power Elite (what I call the Plutocracy) intact.

The nature of propaganda in a so-called free State must then be explored in depth as well.

The last great difficulty is also conceptual. It is relatively straight-forward to present the causes of the coming global crisis: Peak Oil, disintegration of the credit bubble, demographics, etc. Many books do a fine job of outlining the nature of these interlocking crises.

The books attempting to present solutions typically focus on either individuals (along the lines of "get rich as the world falls apart") or idealized policy "fixes" based on academic understandings of large-scale structures (articles on G-20 trade policies, etc). The flaw in both approaches is that neither flows from what I call anintegrated understanding of the actual problems. (Key concepts are italicized when introduced.)

Practical solutions must follow from this integrated understanding. Without such a comprehensive conceptual framework, then all proposed solutions will be ungrounded and thus dangerously misleading.

Any "solution" which ignores key elements of the problem is doomed to solve nothing. As in our example of the so-called "subprime crisis," the "solution" of limiting uncreditworthy borrowers did nothing to address the actual problems: highly profitable and highly fraudulent practices riddling every level of the mortgage/rating/securities industries, perverse incentives that created unprecedented opportunities for windfall exploitation, over-reach and looting, etc.

I cannot claim that reaching such an integrated understanding will be easy. Many of the concepts presented here may be unfamiliar and thus difficult to grasp at first. Many are so alien to status quo "explanations" that they may well strike you as the opposite of "obvious." But since I have thought about these concepts and forces for years, they seem "obvious" to me. In the language of our Declaration of Independence: I hold these truths to be self-evident.

So let us begin.

We stand on the threshold of a Great Transformation that will unfold over the next 20 years--a generation. The exact turn and sequence of events is unknown, but a clear-eyed appraisal of the forces, trends and cycles already at work will help us, collectively and as individuals, weather the challenges and turn what could be a catastrophe into a positive transformation.

To the status quo understanding of how our world works, this appraisal will be anything but "obvious." (Sorting out what is "obvious" is a big part of the analysis which follows.)

A number of other writers have addressed preparing for the Depression which has just begun. These books are, within their limited scope, practical and useful. This book aims at a different goal: once we understand the complex forces at work, then we can structure a response on all three levels: household/family, community and nation. For if there is anything we can confidently predict, it's that the nation's crumbling finances will drastically affect every family and every community.

Key concepts in this Introduction:

Plutocracy (rentier-financial Power Elite)
integrated understanding
windfall exploitation

over-reach

Chapter One: An Overview

A great clash between what we are told is unfolding and what is actually unfolding lies just ahead.

The status quo "Powers That Be" and its mainstream media repeatedly insist that:

We have abundant cheap energy for a long time to come; Peak Oil is decades away. We have plenty of time for technological wonders to arise and replace petroleum.

The Social Security and Medicare entitlements promised to all Americans, though totalling some $50 trillion in excess of projected tax revenues, will be paid; all that is needed are modest policy adjustments.

The current financial meltdown was unexpected and could not have been foreseen; it is a temporary "bad patch" which has already been fixed by government intervention and modest policy/regulatory adjustments.

Environmental issues such as the stripping of the world's fisheries, dead zones in the Chesapeake Bay, dwindling fresh water acquifers, etc. can all be fixed with modest policy adjustments.

The consumerist culture which has evolved over the past 60 years is a natural and highly successful perfection of capitalism, prosperity and American values; Americans are the happiest, most prosperous people on the planet.

The fast-growing epidemic of obesity and related chronic diseases in the U.S. are puzzling and worrisome, but we have the finest healthcare system in the world.

Yet all of the above is demonstrably false. To continue reading, please click on one of the eBook links:

HTML version: Survival+: Structuring Prosperity for Yourself and the Nation

PDF version (111 pages): Survival+

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Craig M. ($30), for your superbly generous contribution to this site. I am greatly honored by your support and readership.

Rumblings and Tremors: Falling Incomes and Housing Price

noreply@blogger.com (Charles Hugh Smith) — Fri, 03 Jul 2009 14:26:00 +0000

Even if housing is bottoming in certain bubble-bust locales, what if incomes are still declining?

Today we begin with two fascinating reports from readers. We start with correspondent Bob Z.'s report on Las Vegas condos--one of several Ground Zeros for the housing bubble.

A house is a money pit, but a vacant house is a liability. We have nearly 20 million of these liabilities all over the country and every one of them is looking for cash, whether it be for taxes, insurance, mortgage payments, condo fees, maintenance and repairs or basic standby utility service. With rising unemployment and declining rents, I submit that we are not at bottom yet.
Those who think the real estate bottom is in should look at real estate markets in Las Vegas, Phoenix or Miami/Fort Lauderdale. In Las Vegas, there is a huge condo complex called Meridian at Hughes Center located 2 blocks from the Strip. 2BR 2BA condos that sold for $540K in fall 2005 were going for about 120K at the beginning of 2009.
My uncle wanted to invest in a couple of units in January but I told him "not yet." I watched the units drop to $99K around March or April, and thought about buying one, but didn't. Today those 2BR units 2 blocks from the Strip can be had for $75K, or about 15 cents on the peak bubble dollar. Another Vegas complex I follow has units that sold at $191K in 2006 now going for $35K.
Is this the bottom for Vegas? Well, I lived there for 8 years, and I don't think the bottom is in just yet. We are getting closer, but the bottom will not be in until we see some of these properties going for 10 cents on the peak bubble dollar. I see similar price declines in Phoenix and Fort Lauderdale, and I think those cities are also getting closer to bottom but they're not there yet.
The reason is simple: We still have rising unemployment and hundreds of thousands of new foreclosures every month. The supply of houses exceeds demand, yet builders are still building new houses!
This is an economic depression. The difference between this depression and the 1930s is that today we have unemployment payments, welfare payments, Social Security and Medicare. Those government programs are why we don't have armies of hobos wandering around the country and massive lines at soup kitchens.
But government tax receipts have fallen off a cliff. If we wait awhile, we will see government no longer able to borrow money, at which point it will be forced to print money or cut spending. Either alternative will finally put the lie to Mr. Bernanke's "green shoots" nonsense, and we will see the proverbial stuff hit the fan.

Thank you, Bob, for this eye-opening account. I would add that there is historical precedent for Bob's estimate of real estate falling to 10% of its bubble heights; in the depths of the Great Depression, some Manhattan buildings sold for less than the installation costs of the elevators.

Will every area's real estate values drop 90%? Of course there will be variations; the main guide will likely be "reversion to the mean," i.e. a return to the valuations established in the late 1990s before the bubble distorted valuations.

I would also suggest that prices will stabilize when it's stone-cold cheaper to buy and own than it is to rent an equivalent dwelling. However, that statement comes with two caveats: even buying at condo for $35,000 might be a poor choice if the capital is trapped. That is, if there are hundreds of other units for sale in that price range, then a buyer might not be able to sell their unit should they want to relocate.

The freedom to move has a price, too.

Secondly, condos have several potentially troublesome traits: common-area monthly fees and the maintenance of the common areas. If a huge condo complex has few paying owners, then it may deteriorate rapidly as there isn't a large enough "critical mass" of paying residents to support the common-area expenses. The first things to go may be the amenities which might have once been the most attractive elements: pools, landscaping, etc.

The other issue about those monthly fees is that they can skyrocket without warning if huge legal or maintenance bills arise. The condo association can't print money so it has no choice but to raise rates. The fewer paying owners there are, the higher the rates may rise for the remaining solvent ones.

Next up: Correspondent Davin D. provided this report on the way incomes can drop without showing up in the headline unemployment statistics:

My story is somewhat tangential to Saturday’s topic about headline employment. I have a full-time job working for the US Government (lowly GS-8) in Austin, Texas. My wife is employed as a librarian in a local suburban school district. One child attends high school and lives at home, while the other is away college.
For the past 12 years or so, I’ve supplemented our income by doing contract work for a major textbook publisher. My assignments consist of correlating various state and local curriculum objectives to the textbooks (i.e. make sure the book contains the required subject matter). It’s been a nice part-time gig that and I’ve been able to earn between $15K-25K annually in my spare time.
Compared to most of the nation, Austin is in reasonably good shape economically. The local unemployment rate is probably around 6%, housing prices never elevated to obscene levels, and I haven’t noticed a surge in foreclosures. Even so, most of the school districts in the area are implementing hiring freezes and/or salary freezes. Apparently budgets are strained everywhere.
Generally, whenever I complete a project, I submit an invoice and receive payment in two to three weeks; at least that’s been the case until this year. I’ve taken several projects this year, however beginning in February, the payments stopped coming. I’ve corresponded back and forth with my contacts and they’ve done likewise with the payroll division. After several apologies, they finally submitted a few payments in May (a small percentage of what they owe me). After the latest round of correspondence, my contact sent me a reply she received from payroll that basically said the company was delaying payments due to cash flow issues.
Now I’m thinking that these problems must have been ongoing for 5 or 6 months. Revenue is of course generated by sales made to school districts which are in turn funded either at the local level or the state level. I understand that California is on the verge of issuing IOU’s to creditors, and several states or making various cuts while they pass budgets for the coming year. It seems likely to me, that many of these schools are going to have to make do with old textbooks or perhaps maintaining a classroom set of books without issuing individual books to students, etc.
If that is the case, independent contractors like myself will be out of luck. In my case, it won’t show up in employment statistics (I’m still employed full-time elsewhere), but I’ll have even less discretionary income, and will have to give up making contributions to my Thrift Saving Plan (the government equivalent to a 403B or 401K). Mine is just one example of shrinking income which does not show up in the statistics. The loss of income will result in our family spending less money in the community on entertainment, dining, and the like.

Thank you, Davin, for this insightful report. This account raises a number of very interesting points. I would start by noting that the "flexible, free-lance/ independent contractor" model of employment which has been lauded for the past decade as the key to America's rising productivity has some serious downsides--and I should know, as I've been a free-lancer for 20 years.

1. No I.C. (independent contractor) qualifies for unemployment, so when they lose steady work there is no backup income. There is no 6 or 9 months' grace period where the free-lancer can work on Plan B--they're relying on savings the moment they cash their last paycheck.

2. We free-lancers pay our own taxes quarterly. Once your income drops then it's dangerously tempting to short-change that next quarterly payment or skip it entirely. Yes, you will owe less because you're making less money, but those with formal jobs don't realize we all pay 15% FICA (self-employed Social Security) on every dollar earned. Toss in state and Federal income taxes and even supposedly low rates (15% Federal, etc.) quickly add up to 35% or more. That means big tax payments, and big tax problems if you fall behind.

3. As Davin points out, free-lancers' income can drop sharply but that won't be reflected in any employment statistic; it will only show up in declining tax revenues. And voila, income tax revenues at both the Federal and state levels have fallen by as much as 40%.

4. Laying off I.C.s and free-lancers is the low-hanging fruit for enterprises cutting back. Based on what I've read and heard, most of these initial "easy" cuts to head count have already been made. So the next wave of lay-offs of formal employees is still rolling. This may partially explain why there are still 500,000 new "official" lay-offs every month.

5. The number of I.C.s and free-lancers in the U.S. economy is simply enormous-- semi-official estimates put the number at 10 million but I would guesstimate the real number is more like double that: 20 million, or about 15% of the entire U.S. workforce of 137 million.

Many of these are facing zero income, others are scraping by with a few temp gigs and favors from old employers. None show up in official statistics. So when you read that 7 million people are officially unemployed, add in 14 million under-employed (barely scraping by) or totally unemployed I.C.s and free-lancers.

6. Many of the industries which supported I.C.s and free-lancers have been reduced to mere shadows of their former glories, and they won't be coming back. The print media industry supported tens of thousands of free-lance writers, editors, marketing types, ad agency temps, etc.--that industry is toast. The "creative" industries like music and film have also suffered huge cutbacks; as the Web has creatively destroyed income streams, then the number of jobs those industries can support shrinks dramatically.

7. "Consulting" is now a synonym for unemployment. Enterprises and government agencies which handed out consulting contracts like candy at Holloween in the good times have slashed consulting contracts to the bone. Many of these consultants had grown accustomed to pulling down $200,000 or more a year; with their incomes now essentially zero, that's a lot of business-class airline seats and fancy restaurant meals which will now go begging.

8. As regular employees get laid off, some will join the already overflowing ranks of I.C.s and free-lancers in the hope that they can transport their skills and contacts into a free-lance income. Some will, but most will be disappointed; principals and managers are trying to maintain their own income and the only way to do so is not hire and not subcontract out any labor except what is absolutely necessary.

It is easy to anticipate a "declining headline unemployment number" even as household incomes continue to fall. The government has a vested interest in spray-painting shriveled brown weeds green (as in "green shoots") but the only real metric of value is tax receipts. Those tell the real story: huge declines in real income and thus in spending.

Our previous lists of hot reading and viewing can be found at Books and Films.

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What If The (Debt-Based) Economy Never Comes Back?

noreply@blogger.com (Charles Hugh Smith) — Thu, 02 Jul 2009 16:06:00 +0000

July 2, 2009

The U.S. economy currently has no Plan B in the event the credit/consumer economy never comes back--a scenario which appears not just likely but inevitable.

Frequent contributor Harun I. brought up several interlocking issues which receive little coverage in the mainstream media: what if the "end of paying work" will bring down the entire credit/consumption-dependent economy and the Federal government which depends on tax revenues from all that financial churn? How long can the dwindling "productive few" support the no-longer productive many?

Sears Gets Aggressive With Debt Forgiveness
While economists generally agree the recession has bottomed out, rising energy prices and a high national unemployment rate is prompting the No. 1 appliance retailer in the United States to give concerned consumers a safety net should they lose their jobs.
This and other debt forgiveness programs and your conversation on the end of paying work (EOPW) (Endgame 3: The End of (Paying) Work) cause me to wonder about the meaning of "work" and "money". Money is just a medium of exchange. In a direct exchange economy money is not needed, however, having a good or service to exchange ensures productive output of some degree by all those who wish to consume goods and services they themselves cannot produce.
At the point homes and goods are given away, i.e. a man has nothing of value to exchange, what is the meaning of money and work to the 20 million whom have no access and therefore no inherent value and to those who must engage in productive output to support the growing numbers of the aforementioned?
Is this not what partly spawned the "we pretend to work, they pretend to pay us" mentality?
When a man knows he will obtain a certain basket of goods and services no matter what his productive output, will not other structural social and economic problems arise that will eventually bring on the collapse of this arrangement?
I agree that government will not "want to let" millions go homeless and starve, however, I question the ongoing ability of bankrupt governments to prevent it. It is a very unpopular truth that population is a very serious problem that we have not discussed in any meaningful way. We cannot empty the cities and returned to a Jeffersonian agrarian society as resources are limited and declining. Decisions over who gets what and how much (give-aways) in the days of EOPW may prove destabilizing.

Correspondent Michael S. recommended this story on a parallel line of thinking: Yes, The Web Will Bankrupt The Government:

Long-argument-short: The explosion of the web created so many new non-financial transactions, non-financial markets, and opportunities to create and enjoy oneself that don't cost a penny, that ultimately we'd move decisively to a more dynamic economy, but one with less actual money. And since we can't pay taxes in "attention", this would cause the government to run short of funds.

Going back to Harun's comment:

In a direct exchange economy money is not needed, however, having a good or service to exchange ensures productive output of some degree by all those who wish to consume goods and services they themselves cannot produce.

In other words: is a high-tax/high-cost economy with tens of millions of people with no prospects of formal paid work sustainable? Can an economy dependent on abundant cheap credit sustain itself once that abundant cheap credit is no longer available? Can an economy with far less money churning through the government tax system sustain a vast entitlement/welfare "Savior State" which "saves" everyone from calamity?

Clearly, there is no Plan B for the U.S. economy. If tens of millions have no income, and are bartering and drawing welfare to survive, then the question arises: are the remaining employed productive enough to support the tens of millions already drawing Social Security, Medicare, SSI, disability, VA pensions, etc., and all the other "pay as you go" programs?

What if the Web, which is busily (creatively) destroying print media, the music industry, the movie business, Microsoft and many other rentier-type enterprises, ends up destroying income and profit-based tax revenues? How can the government support a status quo which requires $2 trillion in new borrowing every year just to keep from collapsing? What if that debt load is unsustainable?

It has long been my thesis that the productive few are increasingly incentivized to "opt out" of the burdensome system they are supporting. I call this mechanism When Belief in the System Fades (March 12, 2008).

I updated the concept earlier this year: Survival+ 10: When Belief in the System Fades (April 9, 2009).

Put another way: can everyone drawing an income (job, pension, unemployment, workfare, etc.) from the State (government at all levels) provide the tax revenues needed to pay the interest and all the other costs the government has promised to pay? If not, then who will be left to pay all the taxes if the productive few opt out?

If jobs and money dry up, so too will the Savior State based on jobs and the churn of money. We need a Plan B economy, one not dependent on cheap, abundant credit, high consumption, high taxes and unsustainable promises.

Our previous lists of hot reading and viewing can be found at Books and Films.

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Interlocking Traps

noreply@blogger.com (Charles Hugh Smith) — Wed, 01 Jul 2009 16:05:00 +0000

A number of lethal traps hobble structural reforms to the failing Status Quo.
NOTE: I apologize for the delays in responding to reader email; yesterday I was away from my desk all day and today our Internet service was down.

While I often refer here to cycles, trends and feedback loops, there is another class of forces called traps which are self-explanatory: once entered, traps are difficult or impossible to escape due to their inherent (ontological) nature. While all the traps have conceptual elements, each is very much grounded in the real world.

For example: once a nation misallocates its capital into unneeded malls, office towers and exurban housing which now sit vacant and decaying, that capital can never be recovered.

Here are few such traps:

1. Stagnation Trap. A pernicious positive feedback loop is at work as the Plutocracy and State continually increase their share of the national income: their power and influence increase proportionately, which then enables even more wealth acquisition and ever greater influence.

The primary consequence of this widening gap between the ever-poorer middle class taxpayers and the ever wealthier State and Plutocracy is a structural divergence between the interests of the Plutocracy and the State and those of the middle class. This widening structural imbalance of power and share of the national wealth creates an ontological (inherent) cynicism and profound political disunitywhich is reflected in the blocking of any structural solution by the State and Plutocracy.

Since the structural problem is State and Plutocracy over-reach, any real solution will necessarily reduce their shares of the national income and limit their joint powers. Loathe to accept even the smallest reduction in their income and power, both the Plutocracy and the State (including all those dependent on its various fiefdoms) resist all structural change with every force at their command.

The inevitable consequence is a profound structural stagnation in which real reform is betrayed in the name of compromise, the same simulacrum "solutions" which leave the powers and income of the State and Plutocracy fully intact are trotted out under new Orwellian names ("Save the American Homeowner Act," etc.) and all discussions of truly structural solutions are ruthlessly eliminated from the mass media or belittled/undermined in classic propaganda manner.

Thus the State and Plutocracy prefer stagnation and eventual collapse to any present-day reduction in their income and power. This is the stagnation trap: in resisting structural change, the State and Plutocracy guarantee a stagnation which inevitably leads to collapse of the very system of privileges and powers they seek to maintain.

2. Scalability Trap. This is a way of describing the inevitability of job losses in any industry as it scales up to technologically optimum (automated) production. Oftwominds.com correspondent K.D. (who coined the term Scalability Trap, as far as I can tell) termed this process a "modernity tax," or the cost of modern productivity.

Iit might be also be considered a "technology/trade tax on employment." That is, if an economy refused technological production then it could not trade such expensively produced products profitably. Even the lowest-cost labor is more expensive than machines because machinery does not get sick, does not need to be trained, does not spoil production with errors, does not riot when idled, etc.

Just as the agricultural workforce of the U.S. has fallen to 2% from 50% as mechanization scaled up, any work which can be largely automated (not just manufacturing, but software coding, tax preparation, etc.) will fall into a scalability trap once the technology is available to automate production.

3. Capital Trap. In my lexicon, there are three distinct applications of this term:

A. Banking/finance capital trap. As bank assets fall in value (mortgages on foreclosed homes and commercial real estate, credit-default derivatives, mortgage-backed securities, etc.) then banks' capital requirements increase dramatically. Additional reserves are simply trapped capital as the capital constraint will lead to a downward spiral of higher interest rates for borrowers (as banks try to "earn their way out of insolvency"), a slowdown in borrowing (due to higher risk management/qualification standards), more loan defaults (as those who planned to roll over old debt find they no longer qualify to do so), and thus more erosion of bank capital as bad-debt/impaired loan losses keep mounting.
B. National investment trap. The U.S. as a nation has poured staggering sums of its national wealth into speculatively built, rapidly depreciating real estate: malls nobody wants to rent or own, roads to weedy subdivisions, 20 million empty homes, office towers with 90% vacancy rates, empty storefronts, etc. The capital in all this unnecessary real estate is trapped because it cannot be sold--it is illiquid except at fire-sale prices, at which point the remaining shards of capital are finally freed but the owners have to book catastrophic losses in the capital.
Rather than be declared insolvent, the owners (often the banks holding foreclosed properties) leave the capital trapped, hoping for some magical rescue via a new real estate bubble.
This misallocated capital hurts the owner and the nation in another way: trapped in impaired and unneeded real estate, it cannot be invested elsewhere where it might earn a real return. Unfortunately, America's suburbs, malls and office parks are now "capital traps" of national savings.
C. Homeowner's capital trap. The housing bubble attracted many buyers who either sought a low-down/no-down speculative investment (i.e. buy a super-leveraged house to "flip" for a quick profit) or who were unqualified by prudent pre-bubble standards but qualified via "liar loans" (no-document mortgages) and fraudulent appraisals and mortgages applications. As prices plummeted, the value of their houses soon fell far below the mortgage and these speculators exited via foreclosure, walking away, etc.
Since these speculators put up little or no capital, there is no capital to be trapped. But those who put down 20% cash or who already owned a home found themselves in a capital trap. When an asset starts depreciating rapidly, the smart investment decision is to sell it quickly and preserve whatever capital you still have--unless it's illiquid, in which case your capital is trapped.
That is the situation facing homeowners in markets where prices tumbled so far and fast that only fire-sale prices attract buyers--and for the vast majority of mortgage holders, that means they receive none of the capital back.
In the housing bubble glory days, these homeowners with capital (equity) could extract it via refinancing or HELOCs (home equity lines of credit). But those credit lines have all but dried up, leaving the capital well and truly trapped.
Though the cliche is that "housing always comes back," the owners of homes in Detroit and other depopulating, de-industrializing locales have found that to be misleading; in hard-hit cities and jobless, service-poor exurbs, house values are dropping toward zero. In these unfortunate situations, the homeowner's capital isn't just trapped; it has vanished entirely.
In many other locales, the capital in housing will remain trapped for years as sellers refuse to accept less than bubble-era valuations and buyers refuse to pay bubble-era prices. This illiquidity stasis requires either a loss of capital (selling at low prices) or trapping the capital (illiquid assets).

4. Value Trap. A value trap occurs when an asset such as a stock or house drops to a level which seems to offer a compelling value. But no sooner does the unwary buyer commit capital to the asset than it starts falling in value again.

The seemingly attractive value caused the buyer to step into the trap. Once snared, the unhappy new owner, drawn to the hope that values will rise again, refuses to sell. As asset values keep slipping, the owner falls into a capital trap: either sell for a stupendous loss of capital or leave the capital trapped in the depreciating asset.

5. Stranded Debt Trap. As assets fall in value, the debt (mortgages, etc.) cannot be repaid. The debt is stranded/trapped and cannot be sold except at fire-sale prices which require the owner to book stupendous losses. In the case of lenders/bankers, accepting/recognizing such losses would generally lead to a formal recognition of insolvency.

6. Saturation Trap. A saturation trap occurs when a product or service deemed essential and backed by a large sunk-cost (i.e. already paid for) infrustructure hits a saturated market: there is simply far too much supply and declining demand. Yet the pressure to keep providing the service or product is immense as so many jobs, enterprises and governmental agencies depend on the market's existence. Examples include homebuilding, mortgages, commercial space, retail, hospitality/lesiure/travel, etc.

In a saturation trap, every attempt to create demand fails as the market is well and truly saturated; there are too many homes for sale, too many mortgages going begging, too many empty hotel rooms, too many garage sales, etc. and the cycle of cutting prices to attract the few remaining customers only extends the losses from weak participants to all participants.

On the supply side, production or capacity is relentlessly trimmed to no avail; the entire edifice must either be carried at a loss with no end or shuttered at a complete loss since there is no market for either the assets or skills.

Advanced capitalist economies are replete with over-indebtedness, overcapacity and thus with saturation traps.

7. Quantification Trap. In many cases, quantifying the situation leads to clarity and thus on to insights. Observation and the accurate logging of quantifiable data is the heart of science.

But economics, finance and human behavior are not always illuminated by choosing a quantifiable metric and then logging data. In some cases, quantification serves to obscure the actual forces and causal mechanisms at work. For instance, almost all economic activity in advanced economies stem from so-called "animal spirits" or the internal state of confidence which triggers some financial or economic decision.

If all the economic field's massive data collection and quantification were actually useful, then economists would be empowered to make more accurate forecasts. As it stands, the overwhelming majority of financial downturns are "unexpected" by economists.

A quantification trap opens when data of questionable value is deployed as an "empirical metric" to support a policy or forecast which then serves to mislead policymakers, enterprises, buyers and sellers. Examples include costly public transport systems justified and constructed with borrowed money based on quantifications which mask the inherent unknowns and risks behind a falsely confident facade of data.

Another classic example is the data presented on the enormous profits to be gained by the purchase of a building, plant, etc.

In other cases, well-meaning researchers seek to quantify situations in which data is inherently incoherent, ambiguous or only marginally relevant.

In other cases, the State or other powerful enterprise presents ginned-up deceptively packaged quantifications which support its policies or propaganda: for instance, the birth-death model of job creation, which magically creates hundreds of thousands of jobs each month in the depths of the current Depression.

8. Skillset Trap. Similar to a saturation trap: the sunk costs of training and the awarding of degrees creates a force akin to a mighty river behind skillsets for which there is no market. We may find that MBAs now classify as skillset traps as countless business schools seek to milk candidates for tuition even as the market for middle managers dries up. We might even find that the entire college/university degree industry is largely a skillset trap as the skills being taught have no analog in the job market.

At the lower end of the employment scale, "computer repair" training continues to attract funding even as it becomes ever cheaper to simply replace defective computers with new ones. Such functionally obsolete skills qualify as skillset traps.

9. Trend Extrapolation Trap. While it can be argued that this is merely a cognitive bias, not a trap, in cases such as the "accidental demographics" behind Social Security then I think it qualifies as a trap, as there is no way out of a policy based on a false trend extrapolation.

The Social Security system (and indeed, all "pay as you go" entitlements) was founded on a worker-retiree ratio of about 20-to-1 and an average lifespan of about 64 years. The trap was the extension of these demographic trends into the distant future.

Now the worker-retiree ratio has slipped to about 2.5-to-1 and the average lifespan has risen to 80+ years even as the retirement age has dropped to 63 and numerous other entitlements such as SSI have been added to the once barebones Social Security program.

Despite official assurances (which ring increasingly hollow), the reality is these programs will go broke far sooner than is politically convenient. Please read The Coming Generational Storm: What You Need to Know about America's Economic Future and Fewer: How the New Demography of Depopulation Will Shape Our Future.

Another trend extrapolation is "economic growth is only way to expand prosperity." While this trend has the appearance of a permanent "law," never before has humanity been so numerous or so dependent on a dwindling, easily portable high-energy resource, i.e. petroleum for that growth and its attendent prosperity.

As several billion people aspire to the high-energy consumption lifestyle enjoyed by the advanced economies, we can anticipate an end to the trendline of ever higher energy consumption and ever higher growth based on resource exploitation.

While it certainly possible that the world's population will enjoy a high-energy consumption lifestyle in 20 years (based on bioengineered algae, or some other "miracle technology" which is scaled up at enermous expense to planetary supply levels) but it certainly won't be enjoying cheap, abundant petroleum-based growth.

For it is also true that the world faces not just Peak Oil but Peak Coal (anthracite), Peak Uranium, and peak rare metals. Technocrat cheerleaders essentially promise that new technologies will seamlessly arise to replace not just fossil fuels but every material facing depletion, but the more one knows about a specific field the more sustained one's skepticism. Thus it seems that lithium-ion batteries cannot be scaled due to materials limitations. Will some battery emerge which is made from sand (silicon) or salt or some other abundant mineral? If not,then the reality is more sobering--we cannot evade one Peak by substitution because the Peaks are not just in oil but in minerals and metals as well.

Thus the idea that some new scalable technology will certainly emerge from some obscure lab to rescue the planet from peak Oil, peak uranium, peak iridium, etc., is, evidence to the contrary, a trend extrapolation trap.

10. Preservation of Institutions Trap. As the payoffs from ever-larger investments and borrowing continue to decline (marginal returns), those bureaucratic institutions which depend on "economic growth" find their own resources shrinking. In defense, each institution and the public unions and technocrats which thrive within its stout walls raise a clarion call that society and the economy will certainly collapse should their institution (or their salaries and benefits) suffer any degradation or diminishment.

Since such institutions, their dependent suppliers/contractors and their symbiotic unions wield tremendous lobbying powers, their cries of anger and despair will be heeded until the public coffers has been completely drained.

There are many pernicious reasons why "preservation of institutions" is such a trap. Consider the "early retirement" or other "buyouts" which are offered to reduce head count; the most competent and experienced will quickly accept the offers, knowing they can pocket the settlement and then seek other employment, while those with few other employemnt options will cling to the safety of the institution, leaving the organization weaker and ever more prone to produce ever more marginalized returns on investment.

Those left behind will be even more strident and desperate in their demands to "save our vital institution" and will thus redouble their lobbying efforts to funnel more of the dwindling tax revenues to their fiefdom. As morale sinks and leadership weakens, the public grows ever more disgusted and dismayed that their taxes are producing such mrginal returns.

Thus an unresolvable conflict arises: those left within the institutional fiefdom will fight for their entitlements with the zealousness of the resentful and desperate, while the taxpayers will rise up in rebellion against paying such high taxes which produce such pathetic returns.

There are other forces at work other than self-reservation and myopic entitlement. In many cases those bound up in the institution's bureaucracy suffer a failure of imagination: they literally cannot imagine the institution without endless staff meetings, various layers of management, and all the other trappings of an enterprise which has lost its way but which remains viable because its source of income is no longer accountable to the market or to its output/results.

Rather than undertake the radical reform all sclerotic, overly complex institutions need, those employed by the fiefdom (or profiting from it indirectly via contracts) will fight to preserve not the institution's purpose but their own entitlements and perquisites. To attempt to preserve the institution in its present high-cost, marginal-returns decline is a trap which will result in complete insolvency/dissolution.

11. Growth Via Credit Trap. In a previous incarnation of capitalism, wage earners were encouraged to save money, thus creating pent-up demand for products and a pool of capital which couldbe lent to private enterprises.

In the current incarnation of neoliberal capitalism, consumption requires ever greater borrowing and debt to sustain ever more mrginal growth. Due to Saturation Traps, basic needs are oversupplied in advanced economies, and thus ever more marginal demand must be manufactured via marketing and low-cost credit. "Growth" in GDP has thus become entirely dependent not on savings and what I call organic demand but on marketing and debt-based consumption.

But as demand and sales rely to an ever-greater extent on ever-increasing borrowing and debt, the trap opens: any reduction in borrowing will cause a near-collapse in demand as the simulacrum of demand falls to organic demand--a level far below what is needed to sustain "growth"as measured in production and consumption.

This trap deepens with every State attempt to prod the over-indebted and over-indulged consumer (once a proud citizen, now nothing but a debt-serf "consumer") into further borrow-and-spend binges; like all alcoholic/addictive-type traps, this cycle of ever more extreme State stimulus-funded-by-debt campaigns has only one end-state: self-destruction.

12. Exemption from Free/Transparent Market Trap. As noted earlier, a key defense against erosion of the Plutocracy/State/high-castes' increasing shares of the national income is the Elites mechanism of "innoculating" themselves against disruptive market forces via the political construction of protected fiefdoms (public unions, private risks being backstopped by socialized guarantees, no-bid contracts with parasite firms, etc.)

The trap is that as each Elite observes another Elites' success is dodging the market forces of change/risk/efficiency/productivity, then its own shrill lobbying efforts to strengthen its own protected fiefdom increase accordingly. The end-state of this process is the Elites' avoidance of market forces except as a simulacrum promoted in officially sanctioned propaganda to persuade the middle class that the destruction of its own wealth and security was the result of "eternal laws" (the invisible hand, etc.) rather than from the complete transfer of risk from the Elites to the middle class taxpayers.

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De Facto Socialism, 20 Million Vacant Houses and Squattertown, USA

noreply@blogger.com (Charles Hugh Smith) — Tue, 30 Jun 2009 15:20:00 +0000

June 30, 2009

Combine rising foreclosures and unemployment with de facto Federal ownership of millions of homes and you eventually get de facto socialized housing.

Correspondent Richard Metzger and I have been discussing the consequences of rising foreclosures/unemployment and the de facto government ownership of millions of U.S. houses via Fannie Mae/Freddie Mac and direct ownership/control of banks.

There are a lot of threads to pull together on this topic, so please bear with me as we set up the contexts.

The party line on the housing bust is that "the market" will solve everything.Millions of foreclosed homes and apartment buildings will be sold to millions of buyers, who will fix them up and rent them out for tidy profits.

One little problem with that rosy scenario: how can unemployed households pay rent? Like all the other "green shoots" scenarios, this one depends on semi-full employment to pan out. But rather than semi-full employment, we're facing a tidal wave of job losses which is far from being spent.

Back in January, I posted this analysis which concluded job losses won't stop at today's 6.7 million but proceed on to 21 million or even 30 million: The End of (Paying) Work .

Meanwhile, house prices continue their relentless decline. Home Prices Continued Their Decline in March (New York Times)

The S&P/Case-Shiller U.S. National Home Price Index – which covers all nine U.S. census divisions – recorded a 19.1% decline in the 1st quarter of 2009 versus the 1st quarter of 2008, the largest decline in the series’ 21-year history. The 10-City and 20-City Composites recorded annual declines of 18.6% and 18.7%, respectively. These are slight improvements from their returns reported for February. (from the report link in the NY Times story)
Overwhelmed, the banks are now taking a different approach: dumping the properties to clear their books, making them “extremely motivated sellers,” as Mr. Havig calls them.

Dumping properties has worked so far because the quantity dribbled onto the market by lenders has been modest and a pool of anxious-to-catch-the-bottom buyers had gathered. But once this shallow pool has been soaked up, then there is no long-term source of buyers.

Indeed, buyers bidding up prices now will regret their impatience in a year as prices continue their inexorable slide downward.

Richard also sent me this story on shrinking Rust Belt cities bulldozing suburbs:

US cities may have to be bulldozed in order to survive: Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

While this is a somewhat sensationalist headline, it does raise a number of complex issues.

1. If an old house has been stripped or left vacant for long periods of time in locales with extreme summers and winters, then it may well be not worth fixing up. Its only value will be for scrap lumber, etc.

2. If a house is still habitable, but outside the shrinking radius of city services, does that matter to someone unable to pay rent on a nicer, more central house? Perhaps not.

3. If such free housing (abandoned, foreclosed and unsold, etc.) outside the shrinking city jurisdiction is occupied by informal residents, i.e. squatters, then what authority (if any) is in place?

I have covered many troubling aspects of the housing bubble's inevitable deflation for years. Just for context, let's glance as the key points in the following stories:

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

If 4% of all American homeowners fall into foreclosure, could that "small number" cause a collapse in the entire housing market? The Pareto principle says: yes.

How 4% of Mortgages Have Brought Down the Entire Market (August 21, 2007)

Back on February 21, 2007, I invoked The Pareto principle to suggest that a mere 4% of U.S. mortgages going bad could bring down the entire U.S. housing and mortgage markets. Seven months later, that call appears to be playing out in spades.
It now seems likely that the 64/4 (80/20) rule is playing out globally--the "limited" subprime meltdown is set to take down the global mortgage market and the trillions in derivatives which have been written on trillions in real estate-based debt.

Will Delinquencies Trigger a New American Revolution? (April 7, 2008)

Two years ago I predicted we'd soon see 5 million foreclosed/distressed homes, 5 million REO/investment/2nd homes languishing on the market and lender/thrift losses of $500 billion. I seem to have undershot the losses...
Interestingly, there are 20 million vacant dwellings in the U.S., of which only 7 million are vacation homes. So much for any perceived "shortage" of housing, of any type.

Feedback Loop of Recession: Housing Bust, Debt and Layoffs (March 10, 2008)

Could 50% of All Homes End Up in Foreclosure? (June 3, 2008)

Just how bad could the housing bust get? How about half of all urban homes being in foreclosure? As stunning or unbelievable as that may sound, it already happened once in the U.S., in the Great Depression, as documented in this report: Lessons from the Great Depression (St. Louis Federal Reserve).

The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)

A disturbing number of mainstream media stories are documenting the appearance of inner-city plagues such as gangs, drugs and graffiti in what were recently middle-class suburbs.

The Company Store, Debt and Serfdom (October 24, 2008)

Most astonishingly, the Ministry of Propaganda has succeeded in diverting the nation's attention from the Company store/debt-serf realities to a bogus "debate" over "socialism" and "capitalism." As Michael Hudson has pointed out, the rentier class which owns the mortgages, loans and credit card debt is not capitalist at all; it is essentially medieval in structure. It takes no risks, creates no innovations, invests no capital in new enterprises or indeed, performs any classical capitalist functions at all.

It simply indebts the serfs, convinces them via doublespeak, propaganda and phony statistics that they are still gloriously "middle class" (that is, obscuring or reifying their true nature as mere miserable debt serfs) and then sits back and collects the interest and profits which the debt serfs will be struggling to pay until their last breath.

This is the real context: a growing army of millions of unemployed, declining housing values and equity, a banking sector bloated with foreclosed/distressed houses which cannot be sold en masse and a Ministry of Propaganda in full-court press on reality.

Unfortunately for Team Propaganda, Reality keeps sneaking through the full-court press and scoring easy dunks. (Shameless basketball analogy.)

Let's return to the key issue of no jobs=no income=no ability to pay rent or mortgage. The entire U.S. system of unemployment insurance is based on the premise that no recession can last longer than six months--thus unemployment runs out after 26 weeks. Now, as dark storm clouds gather, this is being extended to 39 weeks--nine months. But few observers are pondering what happens next year when that nine months' of income expires and millions more lose their jobs.

This raises a fundamental question which Richard poses thusly:

With the news of California's impending financial implosion, and the buzz about cutting off welfare, etc., in the state, I wonder where are they going to expect the tsunami of future homeless families to go? Under a bridge? Their front yards? The curb?
I believe that more than 60% in Los Angeles county are renters. Let's say for sake of argument that the non-bubble related, non-FIRE related industries can only really sustain 75% of CA workers and that there is 25% who are unable to find work. It's not that far off from that now. No one believes the official statistics. When the state resources really get run down, will they still evict unemployed people unable to pay their rent or will there be something like "rent vouchers" like they had in the U.K. pre-Thatcher?
We have no history of widespread government housing here unlike many European countries. How will concepts of private property --and laws-- have to change to deal with something like "rent vouchers" being injected into the picture? It's difficult for me to imagine any other practical method of keeping unemployed renters in their homes, but what of the landlord's obligations to the banks with their mortgages? Does the voucher convert into money at some stage of the game?
This seems to be a pretty toxic string to pull on the already threadbare sweater of the banking system. But for the life of me I cannot think of another way they can handle this situation without riots in the streets.
And suppose if nothing is done and they are allowing evictions and the sheriff's deputies still carry them out... picture up to 10% of renters and their landlords clogging up the courts system. Imagine the news stories about landlords hiring goons to crack the heads of tenants they want out, etc.
When the landlords start walking away, too, that's going to get interesting. It may be that "widespread government housing" in the US of A takes the form of abandoned properties being taken over by the nationalized banking system...

It seems inevitable to me that as jobs vanish and incomes drop, rents will decline and vacancies will rise. This will trigger a wave of foreclosures of landlords who bought rental properties based on full occupancy and high (full employment) rents.

As noted here before, that raise all sorts of other "interesting" issues; readers have recalled living in foreclosed apartment buildings during the late 1980s savings & loan bust and not knowing who even owned the building. There was thus no one to ray rent to.

One key feature of the present is completely unprecedented in American history: the Federal government essentially owns millions of dwellings via its takeover of the GSEs Fannie Mae and Freddie Mac. These two lenders were once quasi-governmentally owned; now the quasi has been dropped. Fannie and Freddie own $5 trillion in mortgages; so when the owner walks away or defaults, guess who ends up owning the house?

You and me: the taxpayers.

Add in trillions of dollars of FHA and VA loans which arein default/distressed--also government guaranteed and thus in a sense government-owned--and direct Federal ownership of shares in major banks (which absorbed mortgage lenders like Countrywide, WAMU and Wachovia in Federally overseen shotgun marriages) and you end up with Federal ownership of a significant portion of the entire U.S. mortgage/housing stock. (Fannie and Freddie alone account for half of all outstanding mortgages.)

Back to Richard's question: so exactly what will the U.S. do with 10 or even 20 million unemployed/low-income households? As noted above, there are already 20 million vacant dwellings. Even bulldozing 2 million of them won't change the big picture, and it certainly won't address the core issue of housing and feeding 10 million households with essentially zero prospects for formal employment in an economy burdened by staggering debt, losses and interest payments and a FIRE (finance, real estate and insurance) economy which has imploded and wil never come back.

The Ministry of Propaganda has an ironic task before it: it must continue its relentless cheerleading and its relentless attacks on "socialism" (whatever that means) even as the Federal government must somehow prepare to deal with 10 or 20 million homeless, broke households on a long-term basis.

Even more ironically, that same Federal government now owns, via Federally backed mortgages, some 20 million dwellings. Now put all this together. Either we face up to 20 million households living in Squattertown, U.S.A. or the Federal government faces up to the obligations it now carries as reluctant owner of 20 million foreclosed/distressed/defaulted dwellings.

Is providing low-cost housing for 20 million homeless people "socialist"? If so, bring it on, Ministry of Propaganda be damned.

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Globalization and China: Neoliberal Capitalism's Last "Fix"

noreply@blogger.com (Charles Hugh Smith) — Tue, 30 Jun 2009 15:18:00 +0000

June 29, 2009

Rather than being the new leader of the global economy, China is the bag-holder in global Capitalism's last 'fix": exploitation passed off as globalization.

What's going to pull the global economy out of deep recession? The current story requires only one word: China. China's massive domestic stimulus is going to spark a sustained domestic demand for Chinese-made goods, lessening China's dependency on exports. Further good news: China's domestic growth will spur demand for commodities and grains, driving prices much higher.

Before we accept this account, perhaps we should step back and look at the larger context of globalization, in which China is only one part. From at least one perspective, the opening of China was simply part of neoliberal Capitalism's last "fix" of a structurally failing system.

From this point of view, China's productive output (largely foreign-owned and controlled, mind you) enabled vast profits to be reaped by global capital even as it opened new markets for advanced economies like Japan and Germany which had literally run out of new markets to exploit for machinery, toolmaking equipment, etc.

More cynically, China offered a low-cost was to evade the West's stringent environmental regulations.

From this point of view, China is not the world-beating leader of the global economy: it is the bag-holder: the last big market ruthlessly exploited and the one which will now be left behind as global capital exists, leaving China to deal with the social rubble and dire ecological consequences of rapid, unconstrained industrialization.

This is a contrarian view--did you expect anything else?--but read on for a longer-term perspective on "the China Miracle." (I know this is heavy lifting, but stick with me for at least a few more paragraphs--CHS.)

One more point to consider before we begin: the history of global trade stretches back thousands of years because it was mutually profitable to both ends of the trade. Globalization proports to be a continuation of such mutually beneficial exchange, but this is only a simulacrum: the reality is that much of globalization is not mutually beneficial exchange of goods but exploitation on the industrial grab-and-run or Plantation models.

In essence, globalization was neoliberal Capitalism's attempt to save itself from the endgame of advanced capitalism foreseen by Marx: overcapacity which leads to a collapse in profits and thus a decline in capital and the overall economy.

Marx's insight was straightforward: the dynamic of capitalism is for production to rise to meet demand--and then keep rising. As demand is sated, capacity continues to grow because Capital is like a shark--it must move forward or it dies, and it moves toward what was immensely profitable in the recent past.

This is how we get overbuilding of office and retail space: as demand (and profits) soar, then everyone with capital rushes in to enjoy the profit spree. But ironically, this massive rush to the most profitable return guarantees overbuilding and overcapacity.

As Marx noted, supply soon overshoots demand and sales plummet, wiping out profits. The end result is a move to monopoly capital, in which a handful of the strongest players squeeze out or buy out all the weaker players who fold as the retrun on capital goes negative (losses). The last players standing then consolidate and shutter most of the capacity, setting up a monopoply which then lowers supply below demand to maintain outsized profits.

All the workers laid off as capacity is shuttered no longer have income so they stop spending, which lowers demand even further. This cycle of boom and bust was inherent to Capitalism and Marx expected them to steadily become ever more extreme.

But capitalism "solved" this cycle of overcapacity and crashing demand/income/profits by turning to new overseas markets. Those with a military-backed Empire (for instance, Great Britain) could simply force new markets for domestic goods into existence overseas: by requiring consumers in India to buy cloth manufactured in England, for instance.

In other cases, advanced capitalist states opened new markets by forcing less developed economies to "offer" their low-cost manufactured goods, which quickly took market share from the more informally produced local goods.

The heyday of colonialism was driven by a simple "virtuous cycle" (virtuous for the advanced economy, not for the subjegated colony) in which the colony was forced to ship its raw materials to the colonial power at low cost while at the same time it was forced to pay a premium for the advanced economy's output/surplus goods.

Since the colonial power's domestic workforce benefitted immensely from this "global trade" (low commodity prices thanks to the exploited colonies and plentiful jobs to make the goods forced onto the colonies) then the Colonial Power's Elites received great political suport for the their one-sided "globalization" policies.

Apologists are quick to point out the supposedly stupendous benefits of this globalization for the "natives": high-quality advanced goods and paying work in an economy with little formal employment. Yet the reality is not so happy-happy: only economies with locally owned productive capacity such as Japan and Korea become wealthy economies. Those former colonies where foreign capital dominates the productive capacity and commodity extraction are in essence still exploited colonies.

Government ownership is also no panacea. When less-developed economies' primary assets (including commodities like oil) are owned and operated by the government, then the nation actually becomes poorer, not wealthier, due to the perverse dynamic of the State (government) and capital.

As profits roll in, the State, unlike private capital, defers investment in favor of political patronage and the spoils of "leadership." The incentives to politicians and the State's technocrat managers is thus to eat their seed corn whenever possible, where private capital understands that surplus capital must be invested or deployed in search of high returns lest it dwindle to zero as all profits are extracted and spent.

This mechanism is called the paradox of plenty in which resource-rich nations such as Venzuela and Argentina grow progressively more impoverished under State control of the nation's assets.

A corollary of this mechanism is the impoverishment of oil-exporting nations who find redistributing the wealth created by fossil fuels much easier than creating a productive labor force and infrastructure. Thus as the income from oil gyrates (and as oil inevitably enters the depletion phase) then the nation has no cultural or economic Plan B to generate national income and wealth.

With these mechanisms in mind, we can see that the advanced economies have attempted to save Capitalism by colonizing China for production and their own domestic populations for forced consumption.

Of the many misconceptions about China's spectacular economic growth, perhaps none is more misleading than the assumption that the capital and surplus profits being made in China will stay in China. Despite the much-touted public ownership of joint-venture companies, much of the profitable production in China is owned by non-PRC (People's Republic of China) companies based in Taiwan, Japan, Korea and the West.

From a more clear-eyed perspective, China has been colonized by advanced economies to lower the cost of production and to establish a dumping ground for environmentally unsound production which their domestic citizenry will no longer tolerate. As with all colonies, the profits are extracted and sent elsewhere while apologists are hired to tout the glories of employment for China's teeming millions.

Until, of course, Marx's overcapacity cycle kicks in. Now that China's stupendous production capacity exceeds the potential demand of the entire world, including its own mostly impoverished domestic populace, then capital is fleeing China in its usual pursuit of higher returns, leaving behind tens of millions of unemployed workers and a toxic landscape.

The Chinese State is now attempting to counter this cycle by spending its own capital on stimulus, but State spending is not a replacement for capital or organic demand. Even worse, the Chinese State saddled its own banks with hundreds of billions of dollars in uncollectible debt in a vain attempt to prop up thousands of State-owned enterprises which racked up gigantic losses even during the boom.

The Chinese State attempted to staunch this open wound by closing thousands of its factories but the uncollectible debts remain, buried by accounting tricks within the books of its four major banks and government finance ministries.

The bloom is off the rose now that the overcapacity in China is no longer profitable to global capital and in essence the Chinese State is left holding the bag: stupendous losses in its own financial system, horrendously costly environmental damage and an industrial infrastructure which is losing value as capital shifts elsewhere.

Meanwhile, advanced Capitalism expanded due to two key innovations: the colonization of its own domestic consumers and the exponential increase in speculative debt instruments.

The essence of colonization is the forcing opening of new markets for surplus production. Frustrated by the poverty of 80% of the Chinese and Indian populaces--people with almost no surplus income cannot consume much in the way of surplus production--global capitalism turned to its own domestic populaces.

By lowering the cost of money to near-zero and generating a gigantic asset bubble in the one asset every middle class consumer already owned--a house--then global capital in essence colonized its own domestic populaces by opening a heretofore limited market for surplus production: a consumerist blow-off of unprecedented scope fueled by limitless credit and a rising asset base (real estate) inflated by the same limitless credit, all extended by a State propelled by the need for the sort of domestic economic growth which maintains political support for the State's leadership elites.

Now that game has expired as the advanced-economy consumers finally reached the limits of their ability to service their rapidly expanding debts. Even the U.S. government's massive meddling and the printing/borrowing of trillions of dollars is not re-inflating the real estate bubble, and thus there is no collateral left to support the limitless credit global capital now requires for growth.

Advanced Capitalism is thus facing a crisis of unprecedented scale and scope: the globalization/colonization "escape" from overcapacity has come to a dead end. While some eternally hopeful capitalists look to the former colonies of Africa as the growth engine for global capitalism, a quick look at the capacity of China and Asia to produce goods quickly reveals that hope as baseless: if we add up the remaining production in the West and developed East Asia with China's monumental new capacity, we find that the global capacity outstrips all potential demand.

The world could easily ship 20 million new autos a year to Africa, but unfortunately for the advanced capitalist nations, there isn't enough income in Africa to support 100 million autos and the vast infrastructre they require. The same can be said of the billion impoverished residents of China and India. Global capital would be delighted to sell them all its surplus production but for the sad fact they have no money or collateral on which to base consumer borrowing.

Now that the global real estate bubble has burst, global capital is facing a real dilemma: it has colonized and exploited virtually every populace available, and there is no one left to exploit. Their lackeys in the governments have eliminated moral hazard (that is, go ahead and speculate wildly, we'll save you all regardless of risk or the size of your losses) and expanded credit exponentially, but never-ending exponential growth is simply not possible.

And so now with the destruction of the bogus real estate bubble and speculative "wealth," global capital has screeched to a halt at the edge of an abyss it has avoided for a hundred years: finally, there is no place left to sell overproduction, and the domestic populaces it depends on for political support are restive as they sense the ground beneath their "prosperity" has fallen away.

Thus global capital is desperately demanding the State print/borrow trillions of dollars in a futile effort to either inflate new bubbles and thus create new markets. The reinflation will fail, even as they push governments into insolvency and fail to save neoliberal capitalism.

Globalization also has a host of other pernicious features.

1. Concentration of resources and political power. Global capital, armed with virtually unlimited access to capital via the capital markets and various exotic instruments such as derivatives, can always outbid local owners/capitalists for resources. Once the forest, oil field, etc. is owned (or joint-ventured with local crony capitalists or Oligarch families) then it is promptly stripped/exploited/depleted.

2. No accountability for enviromental damage. Any environmental damage that results is of no consequence because the local political Elite can be bought for relatively modest sums. There is no profit in cleaning up the site and so to do so would be "irrational" in a rational-market metric.

Perhaps this distance from the environmental consequences of resource/wealth extraction is globalization's most pernicious feature. Mine owners never live near the tailings, and the coal plant's owners never live downwind of the sooty plume, either.

The more distant the owner, the less accountable they are for local consequences.

In today's Internet-savvy world, global capital places some modest value on corporate image, and thus some sort of simulacrum of environmental concern is made and then hyped via company propaganda. In a handful of cases, wise stewardships is not just a propaganda talking point; but the circumstances behind these exceptions are not easily codified.

3. Redistribution of income to capital from labor or local ownership is "necessary" to encourage "investment." Even in Empire States like the U.S., foreign capital is given numerous tax loopholes and other redirections of income to capital. This is always explained as necessary to encourage "investment."

But this greater income did not appear out of thin air; it was redistributed from labor and local owners via tax loopholes and credits. But since global capital is driven to seek the highest returns possible, the income exracted from Locale A is rarely reinvested in Locale A. This justification for the income redistribution--to encourage "investment"--is thus a cover for resource/profit extraction.

In the U.S., global companies like General Motors have received taxpayer bailouts in the tens of billions, supposedly to keep their production and workforce in the U.S., when the demand of global capital for higher returns forces the company to expand in Brazil at the expense of domestic U.S. jobs.

In one sense, the company has no choice. It must deploy its remaining capital at the highest return or simply close down. In the Chinese model the State owns the factories and continues to operate them at a loss. But as China's own state-owned enterprises show, permanent losses are simply not sustainable, even for the government.

4. As middle class jobs are cut, demand falls, exacerbating overcapacity.Global capital shifts away from high cost production (except where that opportunity is limited by the State), replacing middle class employment in advanced economies with lower-cost labor in less-developed economies.

Ironically, this lowers demand for the global companies' goods even as their overseas capacity expands. The net result is that financial speculation becomes an increasingly attractive use for capital. Thus selling consumers credit with which to buy cars becomes more profitable than selling them cars. Additional profit is reaped by bundling these consumer loans into packages--securitization--and selling the newly minted securities to credulous imvestors around the world.

Thus speculative leveraged credit and securitization can vastly increase profits even as production falls.

5. As its own income falls, the middle class follows the lead of global capital by increasingly relying on credit-based speculation rather than production for income. No one is more anxious to pursue speculative gains than someone whose income from labor is declining. Thus homeowners or prospective homeowners were delighted to follow global capital's forays into credit-based real estate speculation.

Unfortunately, speculation is no substitute in the long run for producing actual goods and services, and once the exponential blow-off was reached and the bubble popped, global capital simply sold off (or got bailed out) and moved on, while the middle class speculators were left with staggering losses in real wealth or capital traps (assets declining in value which could not be sold).

6. Due to its global nature, capital is no longer accountable for the consequences of its choices. Here's how it works: global capital gets huge tax credits (incentives that are basically nothing more than redistribtion of income from labor and local entreprenuers to global capital) for "investing" in the local economy. It them mines the local labor and/or resources of profits until overcapacity or depletion strikes. Then it shutters the factory or mine and move its machinery elsewhere, leaving the local economy a shambles. Next it hypes the need for "investment" elsewhere, moving production to wherever offers the highest tax benefits, the least environmental restrictions and the lowest labor costs. Final step: repeat.

From the point of view of global capital, this is "obviously" the only model which "works." Local residents, workers and small-scale enterprise owners will disagree once their locale has been stripmined of profits and wealth.

In sum: globalization is a key driver in the end of paying work and the impoverishment of local labor, resources and enterprise via the redistribution of profits and income to global capital.

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Saturday Quiz: Why Is the Headline Unemployment Rate Bogus?

noreply@blogger.com (Charles Hugh Smith) — Sat, 27 Jun 2009 18:07:00 +0000

As monthly unemployment numbers drop, it's important to recall that the headline unemployment rate is entirely bogus. Here's why.

As the stock market awaits next week's unemployment numbers with barely repressed excitement--for a lower weekly unemployment data point would boost the "green shoots" propaganda campaign greatly--it's a good time to answer this question: Why Is the Headline Unemployment Rate Bogus?

1. The "Continuing claims" headline number is inherently flawed. While the unemployment rate is calculated in a number of ways (the so-called household survey methodology, etc.), the "headline numbers" which the MSMedia highlights are "continuing claims" (that is, the number of outstanding unemployment insurance claims) and "new claims" (the number of newly laid-off workers who filed for unemployment insurance).

All these different methodologies offer multiple opportunities for statistical trickery and spin. Various pundits and academics argue the statistical estimates are "valid," but their arguments are akin to the ancient debates over "how many angels can dance on the head of a pin"?

Here is the relevant description from the horse's mouth, the BLS (Bureau of Labor Statistics):

Differences Between Data Series:

Figures on unemployment insurance claims, prepared by the Employment and Training Administration of the U.S. Department of Labor, exclude, in addition to otherwise eligible persons who do not file claims for benefits,persons who have exhausted their benefit rights, persons who have been disqualified from receiving benefits, new workers who have not earned rights to unemployment insurance, and persons losing jobs not covered by unemployment insurance systems (some workers in agriculture, domestic services, and religious organizations, and self employed and unpaid family workers).
In addition, the qualifications for receiving unemployment compensation differ from the definition of unemployment used in the household survey. For example, persons with a job but not at work and persons working only a few hours during the week are sometimes eligible for unemployment compensation, but are classified as employed rather than unemployed in the household survey.

Among all the gobbledigook we find the truth: once a worker's unemployment insurance benefits expire, that worker is dropped from the count. Yes, the unemployed worker may be counted in the household survey as "discouraged," but he or she might well end up being counted as "employed" because he or she was briefly called back for a few hours of work a week or took an 8-hour a week temp job.

Thus the reality is that long-term structural unemployment is completely masked by the bogus "headline unemployment" numbers. The basic distortion is simple: all these measures of unemployment assume data gathered in "normal times" can be extended into deep, prolonged recessions.

Consider this quote: Low unemployment rate hides rise in long-term jobless:

More than "80 percent of the people looking for a job will find a job in 26 weeks. That is what all the statistics show," said Commerce Secretary Carlos Gutierrez in a recent interview.

In other words, because in good times 80% of the unemployed find new jobs within 26 weeks, we drop everyone from the count after 26 weeks, even in a recession. Now that many states have extended unemployment benefits to 39 weeks, then workers remain in the system an additional 13 weeks. But after 39 weeks, then the long-term unemployed disappear from the count.

As a result, what the "green shoots" propaganda campaign will tout as plummeting unemployment will be in fact only the disappearance of those unemployed being counted in the "headline numbers."

2. The birth/death adjustment similarly extends "good times" trends into deep recession. The headline unemployment numbers get "adjusted" by the so-called birth/death model, which proports to calculate the births and deaths of businesses as a metric of job creation and loss.

Here is the explanation (re-read if you want to take a nap): Net Birth/Death Model (Bureau of Labor Statistics):

Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.

Uh, gotcha. The first line reveals the model's fatal flaw: take research conducted during an unprecedented 26-year period of prosperity, and then extend that "research" into a prolonged recession/depression. Is there any wonder this absurd model generates 200,000+ "new jobs" a month, including tens of thousands in industries which we all know are being gutted, like construction and finance?

The distortions and absurdities go unquestioned because the Status Quo is desperate to maintain the illusion that the U.S. economy is "fundamentally healthy" (false) and that a "green shoots" recovery is underway (also false).Frequent contributor U. Doran sent in this link to data which can't be spun or finessed: tax revenues. Yes, they're plummeting: Tax Revenues Tanking.

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter.
For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion — a decline of 30%.
Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.
Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus — on average about $68 billion.

Thought the "green shoots" propaganda campaign will try most desperately to put a positive spin on the "headline unemployment numbers," tax receipts tell the real story: nobody's making money and nobody's hiring, they're still firing in a frantic effort to keep from going under.

Except Wal-Mart. So everything's ducky.

Thank you, Tom F. ($25), for your most generous contribution to this site. I am greatly honored by your support and readership.

Domino Devolutions: Credit, Assets, Spending, Taxes, Jobs

noreply@blogger.com (Charles Hugh Smith) — Fri, 26 Jun 2009 15:26:00 +0000

The key to understanding the current Depression is the devolution of credit. As that devolved, it has toppled asset valuations, spending, tax revenues and jobs.

To understand the devolution of the global economy (macro) and our own communities (micro), we need to look up the chain of fallen dominoes to the first one: credit.

The debauchery of credit reached its perfection in the housing bubble. Credit, leverage and speculative fraud came to dominate the global economy: the global housing boom depended entirely on abundant credit at low interest rates, leveraged, securitized debt instruments (mortgage backed securities, CDOs, credit default swaps, etc.) and speculative fraud: housing-backed investment securities fraudulently rated and sold as "low-risk," property appraisals fraudulently jacked higher than market, mortgage applications backed with fraudulently stated income, and high-risk "toxic" exotic mortgages fraudulently presented and sold as "low-risk because the property value is rising."

As stated here many times: household income for all but the top 10% "high-caste" technocracy has been stagnant since the mid-1970s. Consumer spending, which made up 70% of the U.S. economy and a significant share of the global GDP, was totally dependent on the housing bubble in three ways:

1. Direct equity extraction via re-financing and HELOCs (home equity lines of credit)

2. The "wealth effect": for the 69% of households who owned a home, their home equity was their chief asset and the vast bulk of their wealth. As that rose, it fed the "animal spirits" so beloved by economists: as people feel wealthier, they spend more freely.

3. The housing bubble created vast new wealth for the middle class and the Elite alike due to the huge transactional churn of tens of millions of houses built and sold, then sold again and again, tens of millions of mortgages originated and then refinanced, tens of millions of new insurance policies written for ever larger amounts, tens of millions of new furniture sales, etc.

As for the Elite (the Plutocracy), the transactional churn was in immensely profitable derivatives and mortgage-backed securities, and a stock market rising on this bubbly "prosperity." The top hedge fund managers averaged $600 million a year in compesnation each while investment banks distributed tens of billions a year in bonuses.

Now the credit bubble has burst and credit is devolving everywhere. The stock market is encountering a spot of bother this morning as it's been discovered (gasp) that consumers are actually saving rather than spending every dollar (and then some) of their income. The signs of credit devolution are everywhere:

Credit card and HELOC limits are being dropped

Credit card issuance has plummeted

Credit card delinquency has risen to 10%

The market for mortgage-backed securities (MBS) has imploded to near-zero

The qualification standards for mortgages have risen

The devolution of global credit and the return of risk aversion means that the transactional churn which created so much of the wealth of the bubble has collapsed.

Even more devastating, the bubble-era asset valuations have also devolved, destroying most of the bubble's illusory rise in home equity. This means the homeowner has no collateral on which to base future borrowing/debt; thus no matter how cheap and abundant credit might be, there is no foundation for additional credit.

The "wealth effect" has devolved as well; people now feel (rightly) much poorer, and their response is to start saving after a decade of euphoric credit0based spending.

The government also debauched credit on a vast scale. The quasi-governmental (and now fully Federally backed) mortgage mills, Freddie Mac and Fannie Mae. churned out over $5 trillion in suspect mortgages. The Treasury borrowed additional trillions, largely from China, Japan and the Gulf oil exporters, to fund the expansion of empire (Good Cop, Bad Cop: Obama, Bush and Iraq June 24, 2009) and the distribution of "free money" to vast entitlement programs like Medicare which enriched a vast network of profitably parasitic enterprises.

Now the U.S. is borrowing $2 trillion a year just to maintain the status quo.The notion that every government on the planet can borrow vast sums each and every year, running stupendous deficits to prop up the status quo, and do so indefinitely, will soon be revealed as impossible. Credit cannot rise exponentially while assets, incomes and profits devolve.

At some point the demand for credit (deficit spending) will outstrip the supply of surplus capital and global interest rates will skyrocket. At that point the global game of "quantititive easing" and propping up the status quo with borrowed money will quickly devolve, as will the illusion that any government can repeal the business cycle and inflate additional asset bubbles at will to prop up consumer spending and tax revenues.

As income, profits and assets all devolve together, tax revenues devolve, too. Local and state governments have grown accustomed to ever higher employee counts, ever higher wages and ever richer benefits. The collapse of tax revenues is now causing state and local spending to contract and the services they provided to devolve.

So the devolution of credit led to the devolution of asset valuations/collateral, income, profits and thus tax revenues. All those dominoes are now toppling the one with the greatest impact on households: jobs.

Back in January I posted an analysis of the U.S. job market ( Endgame 3: The End of (Paying) Work; January 21, 2009) which concluded job losses will rise far beyond the current 6.7 million to 21 or even 30 million. Since this is the most critical devolution in process, I am reposting the key analysis.

Many commentators refer back to the Great Depression as a historical guide or template to our present situation. But our current predicaments are far deeper, as commentators such as James Howard Kunstler have shown. (The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century ) To mention a few of Kunstler's observations:

In 1929, the U.S. was the equivalent of Saudi Arabia today: the world's largest oil producer. Now we have to import fossil fuels on a gigantic scale.

In 1929, the U.S. had a fully functioning rail system for passenger transportation. This has shrunk to a shadow of its former capacity.

As extreme as debt loads were in 1929, our current level of indebtedness (as measured by GDP) is far higher for all sectors: government, business and households.

In 1929, millions of jobless citizens could return to the family farm or a family home in the countryside or small town. Now that the U.S. is heavily urbanized, this "Plan B" is no longer available for most unemployed.

In 1929, the U.S. was a major manufacturing/exporting power which actually ran trade surpluses for much of the previous 50 years.

In 1929, the government sector extracted a much smaller percentage of national income than it does today.

Hidden beneath these visible material, financial and demographic changes is a deeper one: the end of (paying) work.

The drivers behind this long-term decline in paying work cannot be reversed:

1. The U.S. is a high-cost economy with high structural overhead costs which cannot be reduced by any mechanism short of bankruptcy/insolvency or political revolution.

These costs include:

A. High taxes on business and households

B. Absurdly high "healthcare" (a.k.a. "sick-care") costs which are inexorably climbing at twice the rate of growth of the underlying economy

C. High real estate valuations based on cheap, "no-risk" money which have raised the costs of commercial rents and housing to levels which are far beyond historical correlations of real estate to income

D. The growth of government and its employees who have won pension benefits and wages which are roughly twice the cost of average private-sector wages and pension benefits.

2. The Internet and digital information technology are creatively destroying entire industries and entire job classifications which will not be coming back. Examples include the music and publishing industries and administrative overhead jobs such as file clerks and customer service representatives.

Even the IT sector itself (information technology) is vulnerable to the automation of software and coding. In industries such as tax preparation, 90% of their high-priced labor can be replaced by $30 software.

The consequences of the Internet's ubiquity are far-reaching. Not only can vast swaths of digital work be automated, much of the remainder can be performed overseas at lower labor rates than in the U.S. (Recall that up to half of a U.S. employee's compensation costs are healthcare and other overhead costs, so a wage-to-wage comparison will be misleading.)

As the Internet enables telecommuting and home-based digital work then the need for millions of square feet of office space falls, further pressuring the demand for high-cost commercial real estate.

Internet-enabled retail trade (Amazon.com, eBay.com, Zappos, etc.) is decimating high-rent brick-and-mortar retail outlets; as these close their doors then the demand for retail space falls precipitously, pressuring rents downward.

Just as craigslist has essentially wiped out print classified ads and Internet ticket sales have driven most travel agencies out of business, many other fields and industries will be reduced or eliminated by the efficiencies made possible by the Internet. Even fields like education may find the need for costly physical space may diminish as high-cost education migrates online.

Political control depends in large part on a quasi-monopolistic mass media amenable to the political goals of the State and Plutocracy. To the degree that the Web undermines that mass media's monopoly on "news" then it also undermines the political control of the State and its Plutocratic overlords.

The Internet/Web is thus the acme of creative destruction, for it is undermining all monopolies except that of capital and petroleum.

3. Globalization and a semi-open U.S. economy force global corporations and small businesses alike to make efficient cost-benefit analyses of where to deploy capital and shift production. Economies of scale, flexible production and lower tax/labor costs spell the difference between profitability and insolvency.

Hopelessly expensive industries like healthcare which have been protected to date will find global competition for scarce healthcare and pharmaceutical dollars rising.

4. As cheap, abundant energy disappears, the cost of materials, transport and production rise,leaving less for labor. As cheap, abundant energy disappears, tourism and the "leisure industry" is priced beyond the reach of consumers facing declining real wealth and income, slashing service jobs in leisure/tourism.

5. The debt-based consumer economy was not a permanent new level of consumption but a one-time anomaly based on an imprudently engineered reduction in the cost and availability of credit combined with a (false) perception of near-zero risk. The entire FIRE economy (finance, real estate and insurance) will be permanently reduced by digital automation and the shrinking of these sectors as the global debt and real estate bubbles burst.

If history is any guide, then interest rates will rise for a generation, effectively depressing real estate and other debt-dependent assets for a generation.

Though the Federal government is furiously borrowing and printing money, the ability to do so at no cost to the dollar (in terms of depreciating purchasing power) and at low interest rates is ending. Since Federal borrowing of trillions of dollars has effectively backstopped the U.S. GDP, the end of the government's "borrow and spend trillions" campaign will remove that backstop and cause spending and employment to further shrink.

Even worse, the rise in interest rates will divert billions from programs to servicing the Federal debt, further reducing government expenditures on goods and services. Since so much of the debt is held by non-U.S. entities, a significant share of this interest paid will end up overseas. This feedback loop will further reduce Federal spending and employment.

If reckless Federal borrowing and money-creation ends up destroying the purchasing power of the U.S. dollar, then that will add yet another feedback loop as consumers pay more for imported oil and other goods and have less to spend domestically, further suppressing employment.

As collateral (bubble-era real estate valuations) and credit fall, so will consumer debt and the spending it enabled.

6. The demographics of a large cohort (the global Baby Boom) entering retirement coupled with longer lives and costlier "healthcare" options guarantee all government entitlement programs will face insolvency and collapse or greatly reduced benefits within a decade.

One of the consequences of this will be the reduction of currently "healthy" healthcare employment; another will be the diversion of vast sums of income away from consumption and into retirement savings.

7. ESSA (eliminate, simplify, standardize and automate) has barely touched much of the U.S. economy. Union rules, old habits and lush revenues have protected millions of processes, procedures and jobs from the scrutiny of plummeting revenues and taxes. As credit dries up and collateral falls in value, spending falls which reduces employment and taxes, which further erodes jobs in a self-reinforcing feedback loop of ever lower spending and ever falling employment.

For instance, buying a car or property no longer requires the expertise implied by a 6% transaction fee. In effect, the research and transaction could be done digitally.

8. Mechanization and automation form a "scalability trap;" once production can be scaled up then the necessity for human labor permanently declines. If I understand the concept correctly, it refers to the inevitability of new scalable technologies replacing human labor.

In 2008, various analysts estimated the U.S. economy would shed about 2 millions jobs in 2009. Given that as of December 2008 there were over 137 million jobs, that doesn't sound all that horrific. Here are the employment statistics by category from the Bureau of Labor Statistics:

Nonfarm employment.......| 137,331
Goods-producing (1)........| 21,351
Construction ......... 7,141
Manufacturing ....... 13,423
Service-providing (1)......| 115,980
Retail trade (2)....... 15,259
Professional and
business services ..... 17,849
Education and health
services .......... 18,975
Leisure and
hospitality ....... 13,627
Government .......... 22,504

With job losses already exceeding 6.7 million as I write this in June, 2009, it seems the analysts were incredibly optimistic. (That is of course their job.)

Setting aside the absurdly low estimate of 2 million jobs lost, let's look at each category and make a rough back-of-the-envelope estimate for how much paying work each category might support in, say, 18 to 24 months.

Construction. While bridges being repaired will certainly support heavy-construction employment, the far larger categories of residential building and remodeling and commercial construction (office towers, malls, warehouses, etc.) are completely overbuilt for years to come. So let's guesstimate that there will be 50% less demand for construction and a job loss of 3.5 million in this category.

Manufacturing. Unfortunately, a tremendous amount of manufacturing is dependent on construction (glass, appliances, steel, etc.) and transportation (rubber, steel, components, semiconductors, etc.) both of which are in freefalls. Exports are falling as fast as imports. Let's be charitable and only carve off 3.5 million jobs here, leaving 10 million intact.

Retail. Does anyone doubt that fully 1/3 of all retail outlets are now surplus?

We're talking about fulltime positions here; so cutting hours from everyone on the floor may actually save jobs (i.e. hours cut will not show up in the above statistics) but the equivalent fulltime positions (that is, 40 hours of paid work a week) may well have vanished.

Let's guesstimate that 5 million retail positions will no longer be supported by sales/profits.

Professional and Business Services. Legal and accounting services will suffer as businesses fold. Businesses will decide they need fewer contract workers, fewer consultants, fewer financial services and fewer software upgrades. Let's guesstimate that 2.5 million jobs will eventually be lost in this category.

Education and Health Services. These have been the growth industries, along with financial services, during the bogus "prosperity" of the past eight years. Once millions of jobs are shed, then millions of dollars of health insurance are no longer paid by employers, which means healthcare providers will get squeezed along with every other category.

Here is California, college enrollments are being capped as deficits soar; the inevitable next step is to leave jobs unfilled as people retire--one way or another, a reduction in total education employment. Let's guesstimate 1 million of these jobs get cut--perhaps not by layoffs but by retiring workers not being replaced.

Leisure and hospitality. The sad fact is nobody needs to take a cruise or a vacation; both are the acme of discretionary expenditures. I would be shocked if the U.S. economy didn't shed 3.5 million jobs in this category.

Government. Local government (cities, counties, states and agencies) has added 12% more employees in the past eight years of bogus debt-based "prosperity," and the freefall in tax revenues means those 12% of "new" government jobs will vanish--and that's the best-case scenario. Let's guess that a total of 2.5 million jobs will disappear as tax revenues plummet and then keep plummeting.

The total: 21.5 million jobs--10 times the 2008 MSM-approved estimate of 2 million jobs lost. Very few have the stomach to consider the reality that perhaps 20+ million jobs are no longer supportable by private industry revenues and profits and the tax revenues which depend on those profits and jobs. 21.5 million jobs lost works out to about 15.6% unemployment--a full 10% lower than the 25% unemployment rate reached in the Great Depression.

In other words, 21 million jobs lost is actually an optimistic guesstimate compared to what could transpire in the years ahead--a gradual evaporation of 30-35 million jobs. If Federal fiscal stimulus funds a couple million jobs--more likely retaining jobs in heavy construction and manufacturing that would otherwise be lost rather than adding jobs--then the total job loss might not be as severe until the "extra" Federal spending ends.

Just off the top of my head, here are industries which are sure to be hard-hit: media, advertising, cruise ships (many if not most will be mothballed), professional sports (how many people will be able to afford $45 tickets for lousy seats plus $10 for parking and $25 for a few beers and hotdogs?), spas, auto detailing, non-profits, pricey venues like museums which depend on wealthy donors (far fewer of those suddenly)--the list is long indeed.

Even worse, the deeper issue--the End of Work in a resource-profligate and consumer-based economy--isn't even being addressed yet.

Knowledgeable reader Matt S. who first recommended the seminal demographic study The Fourth Turning recently recommended The End of Work by Jeremy Rifkin.

Rifkin's primary point is that the "full employment" of the bubble eras (dot-com asset bubble followed by credit-housing bubble) was a temporary aberration from the underlying trend caused solely by unsustainable credit-based (borrow and spend) consumerism. The longterm trend is this: productivity is raised by the replacement of human labor (jobs) with automation/machines/software.

As productivity rises, the number of jobs decreases.

This reality has long been visible in manufacturing. The reality of competitive global forces lead to factories of robots assembling robot-assembled components with a few hundred humans to maintain the machines. There are already auto factories like this in Japan. The entire world's auto industry will continue shedding workers even if the number of units produced increases.

Rifkin points to the U.S. steel industry as another example. Since 1981, the industry has boosted production by about a third while reducing the number of jobs from 384,000 to 74,000.

Many observers believe the answer is to pay all of us $25/hour for service work so we can all afford the high-priced services provided by each other. In other words, I prepare you a $5 coffee (plus $2 tax) and then spend my earnings on a haircut, downloading a song off iTunes, going to a club and buying a high-priced drink, playing golf, etc. etc.

While this is certainly appealing--a high-wage service economy which is entirely self-supporting-- the nations which most resemble this model (Japan, France, Germany and Scandinavia) all depend on exports and a trade surplus, and all live with structurally high unemployment.

In other words, their prosperity is still based on the old-fashioned model: make and sell more than than you buy/consume from others.

The only nation which has run massive structural trade deficits during "prosperity" is the U.S., and now the painful reality is revealed: that deficit-borrow-spend model has essentially bankrupted the nation.

Here is how the U.S. has gotten away with it: we have arbitraged our currency, in essence creating a "surplus" of chimerical value via the U.S. dollar.

One way to think about this is: we have traded dollars for goods valued at X (in other currencies, in gold, whatever metric you want) and paid for them with currency worth X-$700 billion: the dollar. This is how we have been able to sustain trade deficits which have broken every other profligate nation's economy throughout recorded history.

Since the rest of the world depends entirely on the export/trade surplus model, they really have no choice: either accept the dollar arbitrage (in effect ceding $700 billion in excess value every year to the dollar) or face the end of the export/surplus model.

Since nobody's come up with a sustainable alternative to the export/surplus model, then the entire world accepted the dollar arbitrage: sell to the American consumer, pocket a surplus to support one's economy, and accept the dollar arbitrage.

The U.S. has "exported" two things in exchange for trillions of dollars of oil and other real goods: inflation via a depreciation of its own currency, and "financial instruments" based on the dollar arbitrage. It continues to be a wonderful scam: we print/create with fractional lending as much paper money as we want (X), and everyone continues to accept it as an IOU worth X when in fact it is worth X-Y (with Y being the U.S. trade deficit).

Can this model of global prosperity continue essentially forever? It's hard to see how, but to date it has proven extremely durable because nobody has a Plan B. So it might last for years to come--as long as the dollar arbitrage doesn't become too onerous. At what point does it become too burdensome? Nobody knows.

The Dollar Crisis: Causes, Consequences, Cures argues that this currency arbitrage/structural deficit is indeed unsustainable.

When the scam breaks down, then the export/surplus model will break down, and global unemployment will skyrocket. There is a lot being written now about the "race to the bottom" in currencies, in which every nation/trading bloc is trying to devalue their currency faster than their rivals in order to support their exports. What makes this so laughable is the one currency which is rising is--drum roll, please--the U.S. dollar. Why?

Because every other nation/trading bloc is still pursuing the export/surplus model: sell more than you buy. That requires they not only accept the dollar arbitrage, they must actively support it. Many observers are astounded by the dollar's strength: this profligate nation's currency should be plummeting like a stone, yet instead it rises!

Once you understand the global dollar arbitrage--we buy your goods to support your export/surplus model, and you accept a dollar intrinsically worth less than the the goods sold, and everyone walks away happy--then this seeming impossibility makes sense.

Were the dollar to fall, as many expect, from 80 on the DXY (dollar index) to say 45, then the global export/surplus model of everyone selling their surplus production to the U.S. will no longer work. Since there is no Plan B, then it's in everyone's interest to keep the game going. It's a lot less painful to accept a "hidden" loss via dollar arbitrage than it is to face structural unemployment and civil unrest if the export model breaks down.

We also read how China is going to transition to a domestic economy, but a study of history finds virtually no examples of such a model. Wealth and thus prosperity has always been created by trade, and it precisely the point at which China turned away from global trade in the 16th century that its long decline began.

Rifkin is an optimist, as he sees the possibility of a new model in which "paying work" is replaced by "work" in a high-tech hydrogen-based economy.

While we work toward that goal--or the alternative vision I suggest in Survival+--then we better be ready to fund food stamps and unemployment benefits for 25-30 million people without paying jobs, and find something productive for them to do--for idle hands eventually find employment with the Devil.

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More on Devolution

noreply@blogger.com (Charles Hugh Smith) — Thu, 25 Jun 2009 14:24:00 +0000

Readers expanded on the notion of devolution, prompting me to further my own thinking.

The recent entry on devolution ( Devolution: 20 Predictions) sparked substantive reader commentaries. Astute reader Monnie M. noted that the global supply chains on which we depend are very fragile, and thus a "Black Swan event" which triggers a systemic collapse is not just possible but likely.

I agree that any number of breakdowns could trigger a domino effect, or even a positive feedback (runaway self-reinforcing loop) situation in which each breakdown of a subsystem reinforced the breakdown of a related subsystem.

For example, a major disruption in oil supplies triggers sharp increases in food and food shortages, which add to the social disorder triggered by the oil shortage, etc.

On the other hand, as I have noted here before in my Survival+ series, the system also has negative feedback loops which act to restabilize the system. This interplay of reinforcing and counteracting feedbacks is why I see devolution as not just likely but a mechanism which is already in play. To use another analogy, it is akin to "death by a thousand cuts."

Devolution can also be seen as positive in the sense it is an evolution of an unsustainable system. After mulling over readers' feedback, I think what devolution means to me is a slide down the complexity scale: the piecemeal dissolution or erosion of highly complex systems to simpler forms.

The reason this is painful is that all the people who are feeding at the trough of the complex status quo (think of the 16% of the U.S. economy devoted to sick-care, oops, I mean "healthcare") will resist any decline in their share of the national income with every fiber of their beings.

Thus the system becomes ever more brittle and vulnerable as gradual adaptation is rejected in favor of holding the status quo together with duct tape, accounting trickery (see "California legislature borrows $10 billion from next year, claims to have balanced the budget") and more loans. Having rejected adaptation to resolve the overly complex, financially unsustainable status quo, those feeding at the trough guarantee its devolution: each system breaks down in piecemeal fashion, in effect falling down the stairs of complexity in jarring fashion until it reaches a sustainable level.

We cannot predict the exact timing of this descent, but we can safely predict the bottom level of sustainability is far below current levels. Thus auto/truck sales reached 17 million vehicles a year in the U.S. in the bubble boom times. and now they've fallen down the staircase to 9 million. Sustainability might be 6 million units or even less.

Those feeding at the trough of each industry/State fiefdom will find the reduction in complexity and funding painful, but "unsustainable" means just that. Change of some sort cannot be denied, and so the choice is adaptation, devolution or collapse.

On to readers' comments:

freeacre ( Freeacre & Murph)

"Devolution." Awesome post! I loved it! Maybe it will also lead to:
1) People begin to pick up hitch hikers again. Riders chip in for gas.
2) Neighbors begin to babysit one another's kids or barter the service for foodstuffs or help with gardening, etc.
3) Unemployed teachers are hired by neighborhoods to teach their children in exchange for room and board and a small amount of money.
4) Zillions of RV's are aquired cheap and are parked on public and private land with little regulation. Yurts and assorted hand-made homes are built like crazy. People organize local security teams, like the Guardian Angels.
5) Everybody gardens and barters food, goods, services. If they don't have their own place, they use abandoned ones.
6) People start partying and getting to know each other in block parties and pot lucks, entertain each other making own music for free.
7) Powers That Be try to impose more and more regulation, but are overwhelmed with non-compliance. People just walk away from their debt, credit cards, cell phone contracts, don't renew their drivers licenses, change their names to whimsical substitutes and nicknames. It gets harder and harder for government to keep track of people. Kids make an art form out of computer hacking and misdirecting ruling class and authoritarian telecommunications.
8) The gov't. declares a war and nobody shows up...
9) People get together around bon fires and have ceremonies to "set themselves free."
10) Then, re-named and part of a newly formed tribe, they go on walk-abouts to spread the word....
This could get real interesting....

Frank P.

Good article... and it gives rise to a few other thoughts you might want to consider in part II.
* * *
How about a huge increase in swap meets organized by charities et al. out of which will arise tax evading barter systems.
Cash becomes king, as does hard money, in almost all small transactions and services.
Capital where it still exists will go underground along with whole segments of the real economy.
Local organized crime, other than public servants, will expand.
Vigilantism will likely respond (have you checked out gun/ammo sales lately?)
Corruption in local government will soar rather than be mostly conscribed to county/state/fed levels.
Protection services both illicit and legal will likely be a growth industry. (Do you know a good stock in barrier-fencing?) Banks, grocery and drug stores posting armed security guards at the doors (i.e. like most of Latin America)
Guard dogs become much more common with an upswing in breeder activity.
As Jim Rogers put it, 'capital flight controls will be implemented while the establishment universally opens off shore accounts'
Boat sales have plummeted but will increasingly become home to the displaced. also local piracy will increase.
Possibly a negative immigration rate.
Surge in smuggling of all goods especially foodstuffs and fuel.
Both major political parties will likely fail, existing alternate parties will become dominant players.
Inner sectors of larger cities may become 'dead' zones while small town life will be preferred.
Road blocks may become a common event as will restrictions on travel. (via recently enacted administrative law by USDT)
Small proprietorships will increase as box stores and malls close. (many in the underground economy however)
Speed trap towns will increasingly employ police forces to collect fines on the spot in cash or impound vehicles (basically a form of extortion/hostage taking)
Wild game stocks depleted. (White tail deer had to be reintroduced into Mississippi after the Great Depression)
* * *
Several years ago we traveled to central Asia. Our hotelier in Bukhara told us that government officials come around once a month to collect tax. Its really a shakedown as they took everything leaving him with $10 per month to live on. In Bishkek its common to see old women on the road side with a bathroom scale to weigh passersby for a fee. They had nothing.
I've lived most of my life 'in the country' and I don't mean the burbs. Spent 18 years in rural Alaska and now live in the vicinity of Mount Rainier. In both cases surrounded by trackless miles of unpopulated forest. Most writers' reference points are urban or burban. When fishing SE AK it would be relatively easy to isolate oneself in the waterways' nooks and crannys and avoid other contact for days, even weeks at a time. Subsistence life is hard but abundant. America is still an undeveloped country by population density per sq-mi. I expect to see a rise in squatters especially along streams and rivers here in the NW.

Monnie M.

Interesting piece.
My prediction: It won't happen like this because we'll have an episode, possibly a "Black Swan" event, that will trigger a sudden, overnight systemic collapse.
Such an event could be an EMP attack, a more conventional terrorist attack, or a mechanical failure(s), causing a massive power outage whcih leads to a cascading systemic collapse.
Imagine what a successful terrorist attack just of the magnitude of 911 would do to us now.
It could be a failed Treasury auction (or several within a couple of weeks) leading to a blatant and drastic purchase of these bonds by the Fed, possibly after a Chinese/Russian/European/Middle Eastern boycott of Treasury purchases, and/or throwing much or all of their T-bond holdings on the market. This would cause a bond market collapse and a run on the dollar.
It could be an announcement from China or Middle East that the dollar is no longer the world's main reserve currency, or that the dollar will no longer be accepted at all as payment for oil and possibly other critical commodities. Again, a run on the dollar, a rush into precious metals, and certainly a major move into a barter/black market economy.
It could take the form of widespread public riots following extreme shortages of food and fuel (exacerbated by price controls in a hyperinflationary environment) leading to a declaration of martial law.
It could be a major natural disaster (hurricane or earthquake) or a pandemic disease and quarantine declaration causing a nationwide panic and a buying/hoarding spree.
It could be an Israeli attack on Iran and Iran's closure of the Straits of Hormuz, followed instantly by a surge in the price of oil and a rush to fill car fuel tanks before supplies were exhausted and/or the price exploded.
It could be a federal announcement that welfare checks are being withheld or delayed as a result of an extreme cash flow shortage, or (more likely) a realization that the buying power of those checks has been drastically lowered by hyperinflation without a COLA applied to those government transfer payments, leading to mass rioting and martial law.
It could be the announcement of a "bank holiday" triggering a massive panic and social upheaval.
All of these are plausible possibilities. I'm sure there are several others that I cannot imagine.
I think that you may underestimate the extreme fragility of our system and the thin veneer of our civilization. Consider the effect of our "just in time" ordering, payment, and delivery systems. Ponder the world's very thin food reserves. Think about the rising violent crime rate, the rapidly increasing number of people implementing survivalist planning, and the increase in nonsensical behavior (such as the seemingly very stable, respectable, and responsible SC governor going unannounced to Argentina to see his paramour).
I'd say the gradual drop down to a less functional level you describe is the LEAST likely scenario.

Dave E. (Dave Eriqat)

Fantastic piece! I agree with everything in it, even though I tried to find fault. I especially agree about the emphasis being placed on maintaining the status quo for the insiders, at the expense of the populace. But will they succeed? As you indicate, tax revenue will likely plummet. Eventually, it may fall below what's needed to maintain the status quo, forcing governments to start disbanding to some extent. I could envision entire departments, such as sanitation, being closed and their duties privatized or terminated altogether.
Here's another "prediction" to add to your collection: More beat up cars. I was out driving around after writing you earlier, marveling at all the shiny new cars on the road. When I was a kid, few people had brand new cars. In fact, such an event was a neighborhood event! And there were lots of beat up old cars around.

Thank you, readers, for these insightful commentaries.

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Good Cop, Bad Cop: Obama, Bush and Iraq

noreply@blogger.com (Charles Hugh Smith) — Wed, 24 Jun 2009 13:48:00 +0000

Obama's "good cop" routine has masked the reality that his administration has followed the same policy paths in finance and geopolitics as "bad cop" George W. Bush.

I finally understand the fundamental analogy of American politics, and of course it's drawn from film/television: good cop, bad cop. You know the scenario: Bad Cop enters the room and recalcitrant suspect/perp gazes up in hostile, stony silence.

Bad Cop "softens up" the suspect/perp with a "we're going to kick derriere and take names later" speech and then moves on to hardnosed "persuasion:" It'll be a lot easier on you if you cooperate, tough guy, but if you want to play tough, then fine, play tough; we'll play tougher.

After a round or two of this, Bad Cop appears to lose control and is either restrained from assaulting the suspect/perp or goes ballistic in a spittle-flecked tirade a few inches from the suspect/perp's face which communicates this sobering message: "You think you're crazy? Well, I'm crazier."

Bad Cop then lunges at the suspect/perp, only to be restrained by polite Good Cop, who forcefully pushes Bad Cop out of the room and apologizes to the suspect/perp. Good cop speaks in a reasonable, sonorous tone, the exact opposite of the swaggering, aggressive Bad Cop. Good Cop just wants to reach an understanding with the suspect/perp, and just wants to hear him out.

The suspect/perp is delighted to find a reasonable person in this hellhole cell, and with a few additional reassurances from Good Cop, proceeds to spill his guts.

Later, outside, Good Cop and Bad Cop exchange knowing glances; different techniques, same result.

Exactly what has the Obama administration done that the Bush administration would not have done? Throw even more trillions of dollars at the banking sector? Nope; that is precisely what the Bush administration would have done.

Boost American "boots on the ground" in Afghanistan? Ditto.

Give even more power to a hopelessly opaque, venal, destructive Federal Reserve? Ditto.

Foist off simulacrum reforms of the finance and banking sectors as "real reform"? Ditto.

Maintain the American presence in Iraq, regardless of announced "troop withdrawal deadlines"? Ditto.

Loudly proclaim programs to "save the American homeowner" which end up aiding a mere handful of the millions losing their homes? Ditto.

Announce bailout after bailout, all in the name of "saving jobs" even as it would have been cheaper to simply pay hundreds of thousands of people to stay home or go out and have a good time? How many jobs were saved by giving AIG $150 billion? Some of that money will flow into the gargantuan bonuses of Goldman Sachs employees, but that's also what happened when Bush and Paulson held the reins of power.

The number of jobs created or saved with that $150 billion is miniscule compared to what that money could have funded (say, 100 immense solar-power plants).

Back in April I speculated that perhaps Obama had a secret plan to discredit the investment banker cabal and thus undermine their vast political power and reach:Obama's Secret Plan (April 22, 2009)

Alas, like all hopes for genuine, fundamental reform via the political process, this now seems like a foolish bout of wishful thinking. With the "backstops," guarantees, loans and outright direct investments in the banking sinkhole now totalling $13 trillion (the entire GDP of the nation and 1/3 of its total net worth), there is no way Obama can extricate himself from this deep of a pit except to devalue the dollar, which will have horrific consequences far beyond the banking sinkhole.

Let's consider Iraq--the military/Empire misadventure Obama opposed in the election, an opposition which helped him win the presidency. Yes, a "deadline" of American withdrawal has been announced, but such a timeline was already in the works before Obama was sworn into office. Since U.S. casualties are down in Iraq, the conflict has slipped from the news entirely except for brief coverage of suicide bombs which kill scores of Iraqi civilians (lesser bombs and casualty numbers are simply "noise" that's ignored).

In other words, as far as the general American public is concerned, the war is already over. The only people who still care what goes on in Iraq are the people whose family members are still serving there in the U.S. Armed Forces and various subcontractors with lucrative construction or security contracts.

This seems to suit Obama and the Empire just fine. In fact, it's ideal for both: the American presence slips out to secured bases far from the media limelight and Iraqi civilians, fulfilling the strategic goal of the war from the start: regional dominance.

I addressed this dominance in The Fulcrum of the Mideast?(May 19, 2008):

1. The strategic value of Iraq and Afghanistan is rather obvious. If you want to control or influence the mideast, then by all means take the center, Iraq; and if you want to extend your influence all the way to China, Pakistan, Russia and India, then take Afghanistan, too.
Even as someone who sees the war as a catastrophe I am awed by the sheer ambition of the war's planners and respectful of the strategic implications of how it plays out from here.
A cursory glance at the map offers a staggering array of strategic advantages to controlling or influencing Iraq and Afghanistan. Even to an amateur these pop off the map:
you divide troublemakers Syria and Iran, collaborators despite Syria being Sunni and Iran being Shi'ite.
you sit astride two great rivers in a parched landscape.
you can easily project military power into Turkey, Saudi Arabia, Syria, Iran, Jordan and Kuwait, and threaten Russia's southern flank and Egypt.
your can also fill the airwaves of all these surrounding nations with disruptive ideas/propaganda like freedom of the press, individual liberty, economic opportunity, etc.-- dangerous ideas to the surrounding kleptocracies/oligarchies.
you sandwich Iran between Afghanistan and Iraq.
your land forces are within easy range of air support from the US Navy in the Persian Gulf, Arabian Sea and the Mediterranean Sea, not to mention long-range air power from bases in Europe, Diego Garcia and the U.S. mainland.
Afghanistan is central to "the Stans" and shares a small border with China.
even if you do nothing, you unsettle everyone around you because you hold the strategic aces of location, power projection, etc.
2. We know about the oil, but what else is in play strategically? It's about the oil, of course, but beyond that observation lies a wealth of other factors, such as denying that oil to others who you might want to influence. Just choke off the Straits of Hormuz and a world of leverage suddenly opens up.

Put another way: The U.S. never had to "win" the war to gain strategically; it only had to deprive Iran, Syria and Russia a cost-free sphere of influence/satrapy. It has accomplished that at, in terms of Empire, a rather low "cost." All the power-projection assets were already in place: naval strike forces, bases in Europe and Diego Garcia, etc.

Even more ironically, the oil-thirsty major power with the most to lose from U.S. domination of the region--China--ended up funding the war's financial costs via lending the U.S. $1.5 trillion at stupendously low rates of interest.That, ladies and gentlemen, is Empire writ large.

Knowledgeable correspondent B.C. and I have been discussing Iraq and China in some depth recently. As B.C. noted in a recent email:

China is about 30-50 years late to the auto-oil growth model.
Extrapolating China's ~6-10% trend growth of demand for oil, given the presumed peak production (supply) of 85-87M bbl/day, and assuming an indefinite production plateau (realistic . . .?), China's demand will reach that of the US by '20-'21 (that of the US and Eurozone by '29-'30), andChina will consume the entire world's supply of oil by the mid- to late '30s.
world oil supply
world oil demand
global energy consumption
China's energy consumption
Chinese May oil consumption up 6% year over year
Given the choices of alternatives to cheap oil the world has today, there is simply not enough time between now and the mid- to late '10s to implement viable alternatives to allow current rates of remaining relatively cheap oil consumption and GDP growth for the West and China-Asia to continue, albeit now with the world GDP contracting.
Needless to say, the US and the West cannot allow China's growth and consumption to approach anywhere near what we in the West consume for a host of obvious reasons, thus China faces an imminent day of reckoning at which point its growth trajectory is quite likely to decelerate abruptly and "unexpectedly", and thereafter crash violently.
It is within the context of the emerging global resource constraints and a no-growth trajectory that a breakdown of trade and diplomatic relations and resource wars often occur. Iran, Iraq, Syria-Israel-Palestine, Pakistan, Mexico, Georgia, North Korea, and Afghanistan are all areas of increasing risk of instability or chaos, suggesting that the risk to "globalization", i.e., Anglo-American empire, is rising with each passing day.
US military's oil consumption.
Can the Anglo-American imperial military successfully fight wars on multiple fronts? The Middle East, Central Asia, AND Asia-Pacific? Napoleon and Hitler failed to successfully fight two-front wars. And the Romans eventually succumbed to rising costs and diminishing returns to funding a multi-decade, multi-front defense of empire.

B.C. also made these observations on the U.S. strategic interests in Iraq:

The invasion of Iraq was part of a larger strategy to (1) secure the Mideast oil fields and shipping lanes; (2) encircle and contain Iran; and (3) a forward front against any designs by Russia and China for future moves against Central Asian and Mideast oil supplies.
Recall Hitler's aim in the 1930s to invade, occupy, and colonize Russia, Ukraine, and Belarus as a resource colony of the 1,000-year Reich. Well, Germany accounts for 25% of the Eurozone economy and a disproportionate share of the area's exports.
But the Eurozone is becoming increasingly dependent upon Russia for natural gas supplies, including at least 30% of Russia's exports going to the Eurozone. With Russia's population declining, the country nearing the peak production plateau, and growth likely to be slow or worse, the Eurozone's energy security could someday be at risk.

Thank you, B.C., for these insightful comments and links.

As a result of these energy and geopolitical realities, China has been forced to seek long-term oil contracts with Venezuela (also a major exporter to the U.S., and within the U.S. sphere of military influence established by the Madison Doctrine) and various unstable kleptocracies in Africa--regimes which may prove to be not the most reliable allies or suppliers.

Imagine for a moment if the roles were reversed: The U.S. loans China $1.5 trillion in low-yield loans, money which China used to establish military influence over the heart of the Mideast oil region, forcing the U.S. to seek oil from marginal suppliers a half a world away and from unsavory, profoundly unstable kleptocracies.

No one can say how long any oil-dependent Empire can last, but we can safely assume that the Empire which controls access to most of the world's oil will outlast all others--at least until the oil being exported declines precipitously.

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Devolution: 20 Predictions

noreply@blogger.com (Charles Hugh Smith) — Tue, 23 Jun 2009 13:48:00 +0000

As cities, counties and states default on their obligations and unemployment insurance runs out, devolution sets in.

While some see a collapse of society in our future, right now I see devolution, not revolution. Devolution is both the process of degeneration and the surrender of governmental powers from central authorities to local authorities.

Devolution will take many forms. The key driver behind devolution is simple: there's not enough money to fund the status quo, so something has to be cut, axed, trimmed or devolved. Examples already abound: the number of school days in the year are reduced to shave expenses, two-times-a-week trash pickup is cut to once a week, etc.

The key constraint on devolution is also simple: the status quo power structure must be left intact. Nobody will willingly surrender their power, so devolution means services and front-end expenses will be cut in order to protect back-end administrative powers.

Thus public union bosses won't be suffering any big cuts in pay or benefits, and neither will their municipal and state administration counterparts. (Of course there will be symbolic cuts for PR purposes, but nothing deep.) What will be cut is part-time librarians, custodians, county park staff, etc.--the powerless people who actually serve the public.

As the states run out of money, they will surrender some limited powers to local authorities as a mechanism for ridding their budgets of certain costs. As cities and counties go broke, then they will devolve some modest authority to non-profit groups or volunteers.

As laid off workers' unemployment insurance runs out (yes, even the extensions run out as the states' UI funds drain to zero) then their lifestyles devolve/degrade: first, eating out and vacations go, then new clothing, then the second car, then college, then the house, and so on.

Devolution is a painful process, but the State (all government at all levels) and the Plutocracy (owners of capital and productive assets) vastly prefer devolution to revolution because devolution doesn't threaten the current status quo/Powers That Be at all.

Devolution depends on humanity's innate ability to habituate to nearly anything. Thus humans somehow adapt to concentration camps, bitter cold, intolerable heat, mind-numbing work, etc., especially if the new environment is introduced over time in stages.

Thus the middle class household might actually respond with an anger deep and hot enough to become political if their middle-class lifestyle was taken away in one swoop. But devolution insures that the process is akin to the famous analogy of the boiled frog: if the temperature of the water is increased slowly enough, the frog never notices (or so the story goes) that he is being boiled alive.

The middle class household forced to sell everything and move (surreptitiously) into a storage locker or into an RV will feel a shock of recognition that all has been lost, and that perhaps forces beyond their own personal decisions might be at work: forces which benefitted from Federal bailouts, for instance, in a way they can never hope to. (That $150 billion transferred through AIG to Goldman Sachs would have funded a very large national unemployment insurance pool.)

But if their middle class life is taken away from them over time, in pieces, they will habituate to each loss without any political enlightenment; they have fully internalized the MSM propaganda (and recall the mass media is owned by less than 10 global corporations) that the "problem" is their own, not "the system's."

A revolution occurs when great numbers of people realize that the system benefits the Powers That Be, not the citizenry, despite the PTB's constant assurances that this is the very best system on Earth.

So the surest way to secure one's lofty privileges and powers is to convince the people who have lost everything that it's all their own fault; if they were just smarter, possessed more degrees, had better judgment, weren't hooked on anti-depressants, etc., then they would be jolly, wealthy, etc.

In a similar fashion, local government will attempt to manage the degeneration of their services in such a way that the public does not realize it's being boiled. If the trains and buses all stopped running, people might be angry enough to turn off their TVs and demand some actual, real political change. But if services are slowly degraded over time, the public will sigh and habituate to it.

Meanwhile, the police chief, mayor, union bigwigs, et al. will be driving by in their chauffeured vehicles, making sure "the little people" are swallowing the devolution whole. The politicos' Masters, the Plutocracy who fund their campaigns, will fill their coffers at election time as long as nothing rocks the boat. If the citizenry gets restive, then the politicos will find their funding drying up (Heaven forbid!).

Here are some random devolution predictions for the coming year or three.Many are already visible, so the "prediction" is simply a recognition of a rising trend.

1. Listings on craigslist announcing the selling/giving away of the entire contents of storage lockers will rise.

2. The number of people living in storage lockers "illegally" will rise.

3. Citizens with numerous outstanding traffic tickets will abandon their vehicles when "booted" (locked) by cities as the cars are worth less that the fines due. Cities will start auctioning/scrapping hundreds of abandoned vehicles.

3. The dumping of abandoned clothing, furniture, old computer equipment, etc. on sidewalks and public parks/byways will increase dramatically.

4. Homeless camps will appear in parks and locales which were previously considered off-limits to such public poverty.

5. The number of citizens cited/arrested for unpaid moving and parking violations will rise; judges will begin dismissing the amounts due as the citizens before them have no means of paying the huge fines.

6. Government at all levels will devote increasing resources to revenue collection; new laws giving the State (all levels of government) new powers to stripmine private assets will be passed with strong support from government-dependent special-interests.

7. Government at all levels will assign domestic intelligence assets to the search for additional tax revenues; these actions will be strictly secret.

8. A major sports franchise or two will declare bankruptcy.

9. Spontaneous protests (over evictions, reductions in service, etc.) will increase both in frequency and in the number of participants.

10. Tourism will devolve to visiting relatives and/or car camping; hotels and restaurants in tourist-dependent locales will start closing in ever increasing numbers. Only the top 10% "high-caste" professional and government-technocrat class will be able to travel overseas.

11. Cities and corporations which were previously considered immune to the "recession" will declare losses and huge layoffs.

12. Houses which were snapped up in 2009 for $350,000 on the basis that they once sold for $550,00 will be auctioned for less than $200,000 in late 2010.

13. Local governments outside of the Rust Belt will start aggressively taking over abandoned houses as banks fail and ownership of the properties becomes ambiguous.

14. Local government fines, fees, permits and other business-related licensing will plummet, decimating what was once considered a "safe" revenue stream.

15. State and local government services will rapidly devolve: twice-a-week trash pickup will devolve to once a week; fire stations, libraries and schools will be consolidated; other services will become sporadic.

16. State and local government hikes in fees to use parks, park downtown, drop junk at the dump, get a building permit, etc. will backfire: people will stop going to parks, stop shopping downtown, start dumping junk at night on quiet streets now that the dump is too expensive and start remodeling without permits. Contrary to government expectations, revenues will actually drop faster after all these fees are raised.

17. Church/temple/mosque attendance will rise, as will participation in church/temple/mosque events.

18. Major rock/pop concert tours will be cancelled due to low ticket sales; acts which were "guaranteed to mint millions" wll be forced to cancel their tours.

19. Veterinarians will demand cash to examine pets; people will increasingly be unable to pay for costly procedures for their pets (teeth cleaning, hip replacements, chemotherapy, etc.). Vets will consolidate/close their doors.

20. State/county attempts to openly raise taxes will increasingly trigger tax rebellions and demonstrations; the trickle of residents leaving high-tax states and counties will grow to a flood.

Bonus prediction: California's current deficit of $24 billion will widen by another $10 billion in 2010. What was once considered "impossible"--state default on bonds, pensions and much else--will come to be viewed as inevitable.

The political propaganda which infuses every moment of our lives tries to maintain an artificial distinction between our Tweedledum and Tweedledee political parties: The Dees are all for using the power of the State (all government) to "help the little people" while the Dums are all for unleashing the power of free enterprise, a.k.a. the 1% who control the capital and 2/3 of all productive assets in the nation (the Plutocracy).

The truth is that the State and the Plutocracy are two sides of one coin; each rules with the support and complicity of the other. The distinction drawn between them is a useful distraction, somewhat like drawing a distinction between professional sports teams who swap players in the off-season. "My team" is an abstraction which serves the goal of enriching its owners; "fan" loyalty draws smirks from everyone in the know even as they proclaim "fan day" and "fan appreciation day." (The crosstown rival team is of course "the hated enemy.")

As we watch devolution in action over the next few years, observe how it is managed so the hapless frog won't jump from the pot. That is what they're counting on, of course; a devolution passively accepted by a media-duped, gadget-addicted, self-blaming, depressed, drugged-out populace.

Put another way: devolution is what happens while the Delusionol (tm) wears off.

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The New U.S. Bill of Rights and Two Charts

noreply@blogger.com (Charles Hugh Smith) — Mon, 22 Jun 2009 13:54:00 +0000

To fully reflect current "inalienable rights," a New Bill of Rights should be added to the U.S. Constitution.

Given the mindsets which dominate American culture, a New Bill of Rights should be added to the U.S. Constitution to reflect our additional "inalienable rights." While the original United States Bill of Rights addressed basic liberties, it simply doesn't cover various financial and global rights which are now implicit in 21st century America.

Here are my proposed New Rights:

Amendment One: The Right to Global Empire
The rights of the Nation to construct (by expropriation and war if necessary) and operate a Sole Superpower as a Rogue Empire unrestrained by international rules shall be inviolate.

Amendment Two: The Right to Global Hypocrisy
The rights of the Nation to impose rules and constraints on other nations in matters of trade, currency, debt and other matters shall not be infringed, even as the right to ignore the rules we impose on other nations shall be ours alone.

Amendment Three: The Right to Borrow From Other Nations
The rights of the Nation to borrow unlimited sums of money from other nations shall not be restricted by matters of finance, debt or international law.

Amendment Four: The Right to Cheap Goods
The rights of the people to buy commodities and manufactured goods from other nations at low prices shall be inviolate. (Also known as the "what's our oil doing under your land?" amendment.)

Amendment Five: The Right to Rising Real Estate
That real estate valuations shall always rise is a fundamental right of the people, and the Government is hereby ordered to move Heaven and Earth to insure this right.

Amendment Six: The Right to a Fiat Currency Which Does Not Fall to Zero
Though all fiat currencies are doomed to fall to zero valuation, it is the right of the Nation and its people to exchange U.S. fiat currency (dollars) for tangible goods without limit.

Amendment Seven: The Right to Bomb Others and Be Welcomed as Saviors
It is the inviolate right of the Nation and its people to bomb, shell, and otherwise disrupt and destroy any other nation at our own discretion, regardless of treaties and other international laws; additionally, the right to be welcomed as saviors after the bombing is also held inviolate.

Amendment Eight: The Right to Unlimited Hubris
The Nation and its people reserve the unlimited right to hubris in all forms, eras and places; additionally, the people maintain the right to state this right without irony.

Amendment Nine: The Right to a Permanent State of Denial
The rights of the people to enjoy a permanent state of psychic and spiritual denial shall not be infringed.

Amendment Ten: The Right to a Magic Pill
The rights of the people to be saved from the consequences of their own dietary and lifestyle choices by a highly profitable pharmaceutical "magic pill" paid for by the Federal government shall not be infringed.

I may have missed a few "rights," but hey, this is only a draft.

As a lagniappe, I present two charts of the Dow Jones Industrial Average.Standard-Issue Financial Pundits are meekly suggesting that the U.S. stock market is due for a modest "breather" or perhaps a drop to traditional October lows. I look at this 3-year chart and wonder what on Earth is going to keep this from rolling over and falling from 8,800 to 6,800 now that the spray paint is flaking off the dead weeds which were presented as "green shoots" to a credulous world:

For a longer-term context, here is a chart published earlier this year of the period 1960 to March 2009, courtesy of frequent contributor Harun I. Note that the current "green shoots" rally went right up to the 38.2% fibonacci projection at 8,800 and turned over.

Also note that the first target on the downside is the 50% fibo at around 7,100; the next stop, the 61.8% fibo, just so happens to roughly align with a long-term trend line at around 5,800.

Below that, 4,000 beckons.

I started the year by suggesting the DJIA could bounce back to the 9,700 level, or perhaps even the 10,700 level (the 23.6% fibo on this chart) which would have formed the right shoulder of a massive head and shoulders formation.

Maybe after we finally hit bottom the market will surge to 10,700, but such a surge is not visible in the present tea leaves, at least to me.

Please read the HUGE GIANT BIG FAT DISCLAIMER below; this is not investment advice, it is only the freely offered wanderings and musings of an amateur chartist.

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, D.M.T. ($40), for your kind condolences and encouragement, and for your most generous contributions via mail to this site. Please include your address next time so I can send you a thank-you card. I am greatly honored by your support and readership.

Saturday Haiku and More on Spoiled Brat Syndrome

noreply@blogger.com (Charles Hugh Smith) — Sat, 20 Jun 2009 16:08:00 +0000

Three new haiku from contributors, and reader commentary on Spoiled Brat Syndrome.

I feel blessed to have receive new haiku from frequent contributors Jed H. and Steven R.:

Jed H.:
Clowns, chimps, crooks, cheats, thieves;
Smoke, mirrors, wizards, MAGIC;
The U.S., goin' BROKE!!

Steven R.:
Manipulate truth
One green shoot portends rebirth
dead on arrival
EAUEW!
you are so cynical
but you are correct

You may reckon it is tempting to only reprint reader comments which parallel my own views, but for me the opposite is actually true: I try to reprint those which make an opposing case because I think everyone needs to make up their own mind. After all, there are plenty of propaganda sites where you can go and predictably find what you already know you'll agree with. That does not create an informed public or informed voters. As for the Mainstream Media--it too is propaganda of the most blatant sort, always talking up "green shoots," "the worst is over," "the recovery is underway," etc.

The value of reader commentary to me is that it always opens a new understanding of the full range of the problem/challenge at hand. With that in mind, please read these diverse and thought-provoking commentaries in response to Incentives, Disincentives and Spoiled Brat Syndrome (June 17, 2009).

No one wrote to make the opposing case, i.e. that Americans were not spoiled. That in itself speaks volumes. Certainly not all Americans are spoiled brats, but the mindset of entitlement and self-aggrandizement has conquered the culture.

Laura I.

I enjoy all of your essays, but I really enjoyed the one about the Spoiled Brat Syndrome. I completely agree with everything you said and would like to add one more thing I don’t think you touched on very deeply, something that I see as the worst consequence of the positive reinforcement, everyone is a star culture. That is, few people know how to think; to figure out a way for themselves. Few people know how to recognize the causal relationships that help them understand a situation or recognize an opportunity and few people have the ability to observe/realize the intricate details/ process flow of a situation.
As you said in your essay, your construction foreman got jobs by first observing and targeting another worker on the job site. His ability to produce output kept him the job, but his ability to observe the workings (process flows, who was responsible for what, etc.) and locate an opportunity within those workings is what got him the job.
How many people do you meet nowadays who still have this ability? I meet very few. If you never experience cause and effect in your own life (including the negative effects), how would you ever learn to recognize it in the world at large? I have observed this consistently in young adults making the choices of what college to go to, what to major in, what jobs to apply for. They spend 4+ years obtaining a psychology degree or history degree never wondering what their potential for work/job/career will be when they graduate. Or never contemplating a scenario other than best case. Nor do they ever undertake a return on investment analysis when making the decision on which college to attend. They have no ability to calculate potential consequences of any action including those that obligate them for 20, 50 or 100 thousand dollars. When they search for a job their only criteria is what they “want” to do; not what will the job require, how much do they need to make to pay their bills, support themselves or (gasp!) save for future goals, not to mention position themselves for future career goals.
The ability to strategize, to sacrifice one’s “wants” for a better outcome later has been eliminated. There is a colleague at my work place who openly admitted to a group of his peers including his boss and boss’s boss that he chose his present job over the same job at a different company because he knew here he wouldn’t have to work as hard. (Say what?!?!)
It’s the rare employee now who when finished with an assigned task, tells their boss they are available for a new task. Most sit at their desks or bum around, waiting for their boss to psychically realize their availability. Considering most people don’t like to be micromanaged, you’d think they’d figure out if they volunteered such information, their boss would bug them much less, but that would mean understanding the mechanics of a process and many don’t have that ability.
Worse, they have lost the meaning of what a job is; I employ you to complete tasks for me. If there are no more tasks, then essentially the necessity of that employee has ended as well. Actually accomplishing something at work has become the side-story, not the main idea of being employed.
The other consequence of the spoiled-brat syndrome is a complete inability to assign self-blame, to honestly self-reflect on what could have been done differently, how actions/words were perceived, how could they have been better conveyed. When something doesn’t go right (jobs, relationships, etc), it’s always someone else’s fault. In an effort to nurture self-esteem we have developed a society of people who are all right all of the time. “It’s okay that I am 300 lbs and 5’2” because that’s who I am. It’s okay that I don’t have any idea how take care of my house and car because that’s who I am. It’s okay that my bank account is constantly over-drawn because that’s who I am. I am never wrong.”
All logic and cause and effect has been eliminated in favor of self-esteem. But self-respect, happiness, emotional connectedness and lives with meaning seems to have been lost too. We have become a nation of zombies, having never felt the wretchedness of regret (when did that word become so taboo?) we never experience the true inner satisfaction, the true self respect, the true confidence of a self-earned victory. We have no passions worth sacrifice, no character worth enduring and no sorrow at separation.

Marc B.

I enjoyed your piece today on "spoiled brat syndrome". It's entrenched, but perhaps a contributing factor is that so much of the work today is unnecessary and without meaning.
I've pondered the future of work too. Sadly, under the current system, I see misery ahead for the majority of Americans due to globalization and automation (not to mention crushing debts).
Many rail against the "service" economy, but I don't see how any other outcome could have been expected. Sure we've outsourced much of our manufactuing, but we've automated much of it too. Despite the massive outsourcing, we manufacture far more today than ever and we do so with fewer employees. Just wait until we really start automating away our service jobs. Stores such as Home Depot already have automated/self checkout! Banking is now largely automated too - I haven't dealt with a teller in years.
Another blogger asked me what George Jetson did for a living. His point was that he knew George had a job, but since everything was automated, exactly what did he do? After a little "work" researching the issue, I sent him this link:
The Jetsons
Again, (imo) so much of today's "work" is not only unnecessary, it is also completely without meaning. If you remove vanity from the equation, I'm quite certain we could get by (and possibly be much happier) with less than half our current work force.
The viability of a debt based money system is suspect when supply exceeds demand. I'm not sure it can handle the trend towards a Jetson's type future.
One more thought. I'm short vanity and long free time. Bernanke better hope my mindset doesn't become a trend.

Gene M.

I loved your rant, for one, because I once was a carpenter too. Not a custom worker, I learned my trade building tract houses and 4-plex condos. The burden of the physical work was really hard at first, coming from a university professor's life. The foreman did not have to watch you; he could tell at the end of the day how much you had done. It was produce or you were gone, simple as that. My partner and I finally got so good we could do the work of 3 guys. Then we went into business for ourselves--at the worst possible time, when interest rates were sky high.
Recently when we had some work done at our house, I asked the caucasian contractor about his Mexican workers, who were working pretty hard. He said you can't find Anglos who would work like that. I was pretty shocked, since that was pretty much the norm in my day (the 70's and early 80's).
I know my old friends still in academia recount similar stories about the spoiled brat syndrome. One told me about the female student who wanted to turn her paper in well after the deadline. He said it was probably the first time in her life someone ever said "No" to her. In fact this oldest and dear friend serves up the most F's and C's in his department. Nobody else even gives grades this low.
I've always told my own grown children and anyone else who would listen that you earn your badge as a parent by saying "No." Saying yes is easy. The spoiled brat syndrome and your comments are well expressed by the most current parenting practices, which seem to spread like a virus. I see it in my own daughter and her children, as well as her friends.

K.K.

When you mentioned “gaming the system” it reminded me of the CHP/Cop/Firefighter scam where “most” are now retiring as “disabled” since they get more money and a big chunk of the retirement payments tax free forever.
Caltax.org
KGO News: More Questions In CHP Disability Fraud Probe
80 percent of assistant chiefs retired on disability. Almost as many deputy chiefs did the same.
Pat Macht, Calpers Spokesperson: "If they have a disability retirement and they reach over age 50, we really don't have any enforcement tools to go against them for that kind of fraud." Specifically, state law forbids Calpers from requiring disabled retirees who are 50 or older to submit to another medical evaluation, even if there is evidence of possible fraud.
"Outgoing State Senator Jackie Speier says powerful lobbying interests killed pension reform bills, including her legislation that would have given Calpers that kind of leverage."
As I have mentioned I’m in my mid 40’s and I have firefighter and cop friends who (except one) never finished college and ALL (according to the SF Gate search feature) are now pushing $200K (the one that finished college made almost $300K last year and really does work hard, he is planning to “retire” at 50 then take another job heading another department and then “retire” again at 60 with two pensions of over $500K a year.
The cops don’t have an easy job, but most of my firefighter friends’ work just 10 days a month and are paid big money to sleep (when was the last time you heard of a major fire in a wealthy suburb?). You have to hand it to the guys who keep getting big raises when there are THOUSANDS of people that try out for every open position.

Dave E.

You wrote:
There are many reasons for the ascendency of Spoiled Brat Syndrome, but one is the notion that a job or entitlement is deserved by reason of one's existence.
Heck, this is the attitude I see in government workers. In California now they're talking about slashing all kinds of services to the public, but nary a word about cutting government jobs, many of which are superfluous and wouldn't be missed. The people running the government seem to have the attitude that the purpose of government is to provide them with a job and retirement benefits, I guess just because they are such darn great people. Unless government actually provides a benefit to society, there is no point in having one.

Ken R.

I've been in management a long time and your statement -- In other words, disincentives can be more effective than incentives. That is so wildly un-PC that it truly is "that which cannot be spoken, but only whispered. -- could not be truer. We have another saying that is about "rewards" -- "No good deed goes unpunished."

Thank you, readers. I am working on updating Readers Journal with more excellent reader commentary.

ENDNOTE: What strikes me as the purest form of misleading propaganda is the MSM's shrill insistence that "everything will come back": housing valuations, jobs, tax revenues, etc.

Sadly, this is completely unfounded: None of these things are coming back, not housing, not jobs, and certainly not tax revenues. The structures which supported abundant credit and government-backed mortgages (and thus the housing bubble) are gone. The structures which supported abundant consumer credit and spending (and thus millions of service-sector jobs) are gone. The structures which supported high tax revenues (huge capital gains from stocks and housing, the FIRE economy's transactional fees, rampant irresponsible credit and consumer spending) are also gone.

Pundits/think-tankers making the case that "everything's going to come back" never address the structural decay/destruction which prohibits everything from returning to 2005. Thus they are nothing but propagandists, paid cons and shills of a crumbling status quo.

Thank you, Peter K. ($20), for your extremely generous contribution to this site. I am greatly honored by your support and readership.

California's Crisis Will Crush Green Shoots Rally

noreply@blogger.com (Charles Hugh Smith) — Fri, 19 Jun 2009 15:10:00 +0000

The California economy and thus its state government are imploding like a star in its death throes. California's fiscal crisis will destroy the fantasy that the U.S. economy is "recovering" and "stocks are a buy."

"Black Swan events" are unexpected shockwaves of instability. What do you call a completely predictable shockwave of instability? California.

That the state of California is a fiscal mess is not news, but the full extent of its implosion has been masked by a complacent and complicit media fearful of telling the truth.

Buried in this bland "press-release passing for journalism" story is the ugly reality:Democratic leaders say they're close to budget deal.

The Democrats' plan includes $1.9 billion in new taxes to help close the $24.3 billion deficit. The Democrats' proposal - which includes $11.4 billion in actual cuts to state spending, according to Democrats - is not nearly enough to solve the crisis. The rest of the proposal closes the gap with revenue accelerations, fund shifts and fees.
By comparison, the governor's plan included $15 billion in cuts to state spending. He also proposed billions in fees and one-time solutions, including a $48 surcharge on all residential and commercial property insurance. In addition, the governor wanted to borrow nearly $2 billion from local municipalities, which the Democrats rejected.

Talk about Tweedledum and Tweedledee parties: the only difference between the two parties is the degree of their reliance on accounting trickery, new taxes and fees and what is essentially fraudulent shifting of revenues and expenses to mask the shortfall.

As if that transparent reliance on slight-of-hand wasn't enough--note the Democrats' plan cuts $11 billion, raises $2 billion is taxes, and then buries the other $12 billion through fraudulent accounting, while the Repubs are hiding "only" $8 billion via tricks-- take a look at this chart and read the state Controller's report. Then you'll understand that the state's "leaders" are chasing a ball downhill: by the time they finish crafting a phony budget which satisfies the state unions and their other special-interest overlords, the deficit will have grown from $24.3 billion to $25 billion--on its way to $30 billion.

The chart is from a report (submitted by correspondent Dan K.) which has spread throughout the blogosphere (but not the MSM): April Is a Cruel Month: Personal Income Tax Revenues Portend Deepening Trouble for Many States (Nelson A. Rockefeller Institute of Government)

Here is a report from the California Controller: Statement of General Fund Cash Receipts and Disbursements April 2009

Anyone who thinks the downtrend in tax receipts will suddenly reverse course should step away from the flickering screen of fantasy and re-enter reality. Personal income taxes bring in almost half of all California tax revenues; us plebian residents pay modest income taxes while high-income folks pay about 10%. Let's consider what generated all the big income which generated all the big tax revenues:

Flipping real estate for huge capital gains: Gone, never to return.

Huge stock option gains from tech and Web2.0 company insiders: Gone, never to return.

Huge incomes reaped by realtors, mortgage brokers and other FIRE economy windfall exploiters: Gone, never to return.

But wait, there's more: structural changes are gutting Hollywood, the music industry, tourism and the vaunted tech industry--the last props left now that the FIRE economy is reduced to cinders.

Meanwhile, as those paying huge taxes go broke, downsize or simply pack up and leave, the Democratic "leadership" refuses to consider even a 5% pay cut for the state work force. Question for both parties' "leaders": where do you think you're going to find $8-$12 billion to fill the shortfall you're masking with tricks? Do you really think the FIRE (finance, real estate, insurance) economy will roar back from the ashes and generate $15 billion in new tax revenue in 2010?

May I introduce a strange new concept, reality, to your calculations? Count on another $10 billion shortfall in 2010, not a $10 billion windfall.

The transparency of their desperation to cling to the status quo is breathtaking: do they really expect the bond market to accept that a $25 billion deficit has been "resolved" with $11 billion in actual expense reductions, $2 billion in new taxes and $12 billion in accounting tricks?

Who is willing to bet money (i.e. give California cash) that the state will not add to the remaining $12 billion deficit for this fiscal year with another $10 billion next year, and so on until the state finally defaults?

Apparently not the Obama administration. As beholden as the Obama administration is to the unions and Democrats of California, they can discern the end-state of bailing out California: any bailout of the Golden State would be followed by 49 other requests for bailouts (as if the $787 billion "stimulus" package wasn't already a bailout of the states.)

Even more dispiriting for the "leaders" of California, the realists in the Obama White House recognize that bailing out California in 2009 will require bailing it out in 2010, 2011, 2012, etc. A state which refuses to deal with a $25 billion deficit has no track record to suggest it will tear itself away from fantasy and political cowardice in 2010 or indeed, any year.

The bond market might just decide enough is enough and refuse to lend money to California to paper over its $8-$12 billion deficit for 2009. Then the state will have no choice but to default on some of its obligations. The clock is running, as the state controller has said that California will run out of cash within 50 days.

If you look at the trendline in the chart above, that appears to be an overly optimistic assessment. I would hazard a guess of 30 days, max, before implosion.

People like to say California is like a nation itself--and in terms of size, population and GDP, it is like a nation: the nation of Zimbabwe, another failed state with failed "leaders."

What do you reckon will happen to the "green shoots" stock market rally when California defaults on its obligations? Even with all the manipulation and propaganda of Wall Sreet and the MSM in full play, I doubt the rally will be able to shirk off the default of California. Maybe the "players" will realize the jig is up, and their rush to the exits has a name: crash.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The End of Oil: On the Edge of a Perilous New World

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

On chemical/toxins overload:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, Jim S. ($20), for your most generous (multiple) contribution to this site. I am greatly honored by your support and readership.

Pavlov's Dog and Jim Cramer's Call of the Bottom in Housing

noreply@blogger.com (Charles Hugh Smith) — Thu, 18 Jun 2009 13:20:00 +0000

Like Pavlov's dog, Jim Cramer announces "the bottom is in" every time he sees a housing chart. Sadly, this is a conditioned response, not reality.

In Pavlov's famous experiment, a dog hearing a ringing bell began drooling as if food was present. In a bizarre parallel to the classic experiment, Jim Cramer announces "the bottom is in" every time he sees a housing chart.

Pavlov began his experiment by showing his dog a bowl of food (powdered meat). The dog naturally salivated, what Pavlov termed an unconditioned response. Then Pavlov rang a bell when food was presented; the bell was a neutral stimulus. Finally, he rang the bell without any food present; the dog began salivating. This salivation is called a conditioned response, and the process is called classical conditioning.

Sadly, we can observe this behavior now in Jim Cramer, who nonsensically called a bottom as housing starts leaped. Here's Jim's call, dated 6/16/09:Cramer: Housing Has Officially Bottomed:

According to the Commerce Department, there were 47,000 more housing starts in May than the 485,000 expected, a number 17% higher than the month before. The two regions seemingly in the biggest hole, the South and West, jumped about 17% and 29%, respectively. Building permits, which can predict the market’s future to a certain extent, showed significant growth as well. Now Cramer – and probably the homebuilders, too – sense an end the morass that weighed so heavily on the markets.
What does a bottom look like? It’s the combination of ramping sales, and sales in certain areas are up ten times those of last year, and an end to falling prices. That’s exactly what we’ve seen for the past three months, Cramer said.

Here's how the conditioned response process works:

Since Jim saw viewer statistics jumped every time he called a bottom in housing, now he can't help it: every time he sees a housing chart now, he calls a bottom in housing:

Uh, Jim, we hate to tell you, but building more housing when there's a huge inventory of unsold houses and condos as interest rates are leaping up is not exactly bullish. (Psychotic disassociation from reality would be the official diagnosis.) We know this chart is just going to trigger more of your copious bottom-calling, but look at this and tell us what's so bullish:

This recent "improvement" in sales is a tiny blip up within a massive collapse. To call a bottom based on such a modest increase is truly psychotic disassociation; statistically, both the increase in sales and housing starts are minor enough to qualify as statistical irrelevancies, a.k.a. "noise."

Then there's the little matter of rising mortgage rates. Sales are announced when they're signed, not when they close, so oops, a whole passel of buyers might get bumped or simply bail when they calculate what the half-point rise in rates will do to their monthly nut. So in other words, the glowing sales numbers are highly likely to be revised downward once actual escrow closings are tabulated.

Then there's the little matter of unprecedented levels of debt in the U.S.:

The peak of mortgage resets lies ahead, too, which doesn't bode well for the fantasy the sales will chew through all existing inventory; if history is any guide, inventories will rise even further as resets cull many of the remaining homeowners who still have jobs, never mind those who have yet to lose their incomes, further swamping whatever dwindling sales actually close:

In conclusion: a conditioned response is not a substitute for reality. Just because the dog started drooling, Jim, didn't mean there was any food to chow down. And in a parallel fashion, just because you announce a bottom in housing doesn't mean there is any substance to your call.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, Ryan R. ($20), for your superbly generous contribution to this site. I am greatly honored by your support and readership.

Incentives, Disincentives and Spoiled Brat Syndrome

noreply@blogger.com (Charles Hugh Smith) — Wed, 17 Jun 2009 13:50:00 +0000

It is stupendously politically incorrect to note that humans respond to both incentives/praise and disincentives/negative consequences.

There is a great divide in the U.S. economy which will only be bridged by the coming insolvency of the Federal and state governments: those who can be fired/laid off and those who still feel entitled to their job regardless of their output.

One of my carpentry masters was an African-American gent from New Orleans. Back in the early 1970s when I first began working for him and his partner (a Caucasian gent), he told me that how he'd found work in tough times was to approach the foreman of a construction project, point to a worker on the site and say that he could do more work than that guy.

The foreman would give him a once-over and put him to work. The next day, the other guy would be gone and my boss would have his job.

That's called getting and holding a job based on output and nothing else.

Now we have a culture and economy based on Spoiled Brat Syndrome: only incentives and praise are allowed as motivators. One of my correspondents emailed me this reflection of Corporate America management practice:

We are providing management training for our management team and there are four areas that motivate most people:
1. Learning and/or teaching
2. Being creative and/or problem solving
3. Helping others and/or making a contribution
4. Taking risks.

I'm all for positive motivation, but if we read between the lines, here is what's being communicated: since we can't fire you or motivate you with disincentives then we have to offer happy-happy Spoiled Brat Syndrome "positive motivators" to get you to perform.

Every parent knows the ideological "religion" in education now is positive praise, gold stars for showing up, grade inflation (every kid is a genius and deserves an A), etc.

Yet strangely enough, studies have shown that people habituate very quickly to constant praise and regular pay raises and that such positive reinforcement/incentives quickly lose their motivational effectiveness. (Unpredictable "out of the blue" bonuses work far better than scheduled raises.)

Instead, an entitlement attitude takes hold in which pay raises, additional benefits, constant praise and an A for mediocre results are expected, and any reversal is met with resentment and a profound sense of disenchantment: what was owed/deserved was unfairly withheld.

That is, Spoiled Brat Syndrome, in which said Spoiled Brat whines and cries if he doesn't get a new toy every time Mommy takes him into a store.

There are many reasons for the ascendency of Spoiled Brat Syndrome, but one is the notion that a job or entitlement is deserved by reason of one's existence. Perhaps there are faint traces of industrial unionism remaining from much different times, when laborers toiled in low-skill factory positions which were interchangeable--the next guy could tighten the bolt as well as you could, and so a union was necessary to protect the laborers from outright exploitation.

But now the union movement has taken over white-collar/service sectors where output is highly correlated to an individual's training, motivation, attitude, etc. Lazy workers receive the same pay and benefits as highly productive workers, so the incentives to be productive are weakened to near-zero. Disincentives are simply not allowed; workers can be censured or punished for non-politically-correct language or behavior, but not for low productivity/output.

In "protected" fiefdoms, the worker at risk of losing their job due to incompetence, laziness, low productivity/output knows to file a "stress claim" via workers compensation so they can get paid to stay home, and then file a grievance for unlawful termination in the hopes that a fat legal settlement will ease the pain of being laid off. (This is known as "gaming the system.")

Please don't say it isn't so; these accounts come first-hand.

Circumstances are slowly changing because neither local government nor corporate America can print money. Thus as tax revenues and sales plummet, eventually labor costs (fully 3/4 of all local government expenses) have to be trimmed, regardless of union rules. Unfortunately, the rules usually favor seniority over competence or productivity, so once again the laziest and least productive have every motivation to cling on.

I am well aware that simply telling the introductory story will draw accusations of this being a rant. In other words, simply noting that jobs once went to people based solely on their productivity and output rather than on their other attributes, and that not being able or willing to match (or better) others' output would cost you your job, is verboten. Only incentives are allowed now in every sector above field hand. Disincentives are poisonously politically incorrect.

And this is how you get a culture and economy drenched in Spoiled Brat Syndrome. Nothing bad is going to happen to me, so why bother making my best effort? I'm going to get what's coming to me regardless.

Over the past 25 years I have from time to time managed rental properties as a way of leveraging my DIY skills (not that high, but high enough to repair most minor things). I noticed that when the owners attempted to "reward" responsible tenants by returning their security deposit a few days before they actually vacate, the apartments were generally left an untidy mess.

When tenants, excellent and mediocre alike, get the same letter stipulating that the deposit will only be returned in full after an inspection which follows a detailed checklist (an objective metric), then magically, the good tenants leave their units spotless and mediocre tenants either make a good-faith effort to clean up (especially pathetic for many bachelors) or apologetically confess that they know the place is a mess and they won't be getting their deposits back.

In other words, disincentives can be more effective than incentives. That is so wildly un-PC that it truly is "that which cannot be spoken, but only whispered."

The great divide between entitlements (which can't possibly be paid at current levels past about 2014) and "guaranteed jobs" and the real world is about to be bridged. As corporations shrink relentlessly and cities and counties declare bankruptcy, dissolving unaffordable union contracts and pension entitlements, then managers may well find that having hungry and motivated applicants claiming they can do the job better and faster will improve employee output far more effectively than another round of corporate-speak and "facilitators" spouting a threadbare "rah-rah, go team!" line of "motivation."

Yes, I have been "securely" (heh) on the fringes of the U.S. economy since 1971. And yes, I understand many managers/bosses are abusive, dictatorial and unfair and that many workplaces are hellholes. The only boss you can't fault is yourself. When you're your own boss, then your focus is on providing better value than others to your customers/clients, and if there is no demand for your goods or services then you switch to some good or service which is in demand.

I also know our various financial "rights" have been funded by borrowing trillions of dollars from overseas, and our stupendous consumption of tangible goods has been financed by the exchange of paper (dollars) for tangible goods produced overseas.

This trade is not a "right," it is a con. Both cons (borrowing trillions which we can never pay back in equivalent purchasing power, and exchanging paper for tangible goods) will blow up within a year, and our various "rights" will lose meaning as we will face the responsibility of living within our means.

I also know various uninformed voices believe we can satisfy our financial "rights" by "taxing the rich." So let's see how that works. Let's not fool around with taxes; let's just seize $12 trillion from the Plutocracy which owns some 2/3 of the productive wealth of the nation. All that $12 trillion does is back up what the Fed and Treasury have guaranteed/promised/borrowed to bail out the financial sector.

Now let's pay for the $2 trillion annual deficits for another 6 years (until 2015) by seizing another $12 trillion from what's left of the Power Elite's holdings. (If all asset classes other than gold fall in value in the coming years, as I consider inevitable, then our total national wealth will drop from about $48 trillion to some much lower total. Recall it's already declined $13 trillion in the past 18 months.)

So in 6 years we will have seized $24 trillion from "the richest of the rich," the majority of their wealth, and then what will we use to pay the next 6 years of deficits? What exactly have we solved by seizing $24 trillion in wealth to cover a bailout of the rentier-finance sector and a mere 6 years of Federal deficit?

The twin cons are up. The rest of the world has grown tired of the cons: lending us trillions which will never be paid back in equivalent purchasing power, and trading tangible goods and assets for paper which might revert to its intrinsic value, zero.

I think Douglas MacArthur got it right: "There is no security on this earth; there is only opportunity."

That is about as far from Spoiled Brat Syndrome as you can get.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Richard S. ($5), for your much-appreciated generous contribution to this site. I am greatly honored by your support and readership.

A Skeptical Look at High Inflation

noreply@blogger.com (Charles Hugh Smith) — Tue, 16 Jun 2009 13:39:00 +0000

Two points are often overlooked by those seeing inflation as inevitable: it's neither good for the U.S. Treasury nor for the super-wealthy who influence Congress.

The gospel of inflation is that it's desirable because old debt can then be paid off with hugely depreciated dollars. Maybe, but there are two flies in the ointment.

Let's say you head the U.S. Treasury. (No, this is not a nightmare; it's only a terribly bleak thought experiment.) Now since inflation won't rise from 0% to 100% in an instant, there will a period of rising inflation.

Let's say inflation jumps to 10% a year--similar to the rate in the late 1970s. Now several peculiar things happen when inflation jumps to 10%; the most important one is that all those trillions in Treasury (and other) bonds which are outstanding are now worth a lot less. Why? Because buyers look out 10 years or 20 years or 30 years and quickly reckon at that 10% inflation or so, that long-term bond will be worth approximately a bucket of warm spit when it finally come due.

Another funny thing happens to interest rates. When we try to sell new T-bills to our wonderful friends overseas for a 4% annual return, they observe that they will be losing 6% a year for the full term of the bond--and that's if the dollar doesn't plummet, in which case the new bond might reach "warm bucket of spit" valuation even before it comes due in 10 or 20 or 30 years.

Even our closest, dearest, most gullible friends will conclude that losing 6% at a minimum is not a wise investment. So nobody in their right mind will buy the new Treasury bonds which you have to sell every week in untold billions.

So what rate of return would entice folks to part with their cash? How about a real rate of return of say, 4%, plus a premium in the event inflation in the U.S. continues rising. So let's say a minimum of 15%.

Another funny thing happens to existing bonds paying 3% when new bonds yield 15%. The old bonds drop hugely in value because one way or the other buyers now expect 15% return. So a $10,000 bond paying 3% will drop to $2,000 in value so that its effective yield is equivalent to the new bond yield of 15%.

Now remember that the U.S. Treasury needs to sell a couple trillion dollars of new debt every year from now until doomsday. (Forget the fantasy that the economy is going to recover and tax revenues will skyrocket.) Not only that, but the Treasury also has to roll over trillions in old debt which comes due. That's a heap of trillions, and guess what--there is no Plan B except to print off a couple trillion dollars and "monetize" the debt by buying it with newly printed dollars.

Nobody knows what will happen if the Federal Reserve and the Treasury try to corner the global market in Treasuries with money created out of thin air, but most guess that will nudge up inflation--the very problem that put us in this pickle, i.e. nobody wants to buy our debt at 4% when inflation is 10% and climbing.

You see the point: the idea that inflation is "good" for the Treasury is purely academic. In the real world in which the Treasury has to sell hundreds of billions of dollars of new bonds every year, inflation means interest rates will have to jump high enough to offer a positive return (above inflation) and that will destroy the existing bonds' value and decapitate the housing market all in one swoop.

We might also anticipate that all our dear friends who foolishly invested their hard-earned cash in Treasuries in years gone by might not be too overjoyed to find that their previous investments are now worth 20% of face value. That lack of joy might motivate them to never buy another T-bill again.

So the idea that the Fed and the Treasury are looking forward to a sharp rise in inflation simply does not make sense in the real world of selling tens of billions of new bonds each and every week.

We can also anticipate that corporations will not be too thrilled at having to pay 15% in order to issue new corporate bonds.

Now let's say your family controls $200 million or so in productive assets.(Nice gig, eh?) Yes, you're one of the rentier-financial Power Elite, a.k.a. the Plutocracy. As inflation ramps up, followed by interest rates, does that make you feel all warm and fuzzy? Probably not, because inflation introduces a great uncertainty in your assets and returns. Tangible assets will go up, of course, but then the high cost of money means financing is nearly impossible to get; and no matter how fast your enterprises raise rents and prices, they're always behind inflation.

Yes, you can play around with hedging the dollar and so on, but since nobody knows whether inflation will stabilize, double, or fall, it's difficult to choose high-yield strategies. Meanwhile, your income is rising and so are your taxes (assuming you pay any, heh.)

Now since you give various high-powered congresspeople a couple hundred thousand each, plus a few million dollars to various parties and PACs, the politicos perk up when you call and tell them this inflation is wreaking havoc on your business.

You see the point: inflation is not all that great for the 1% of the citizenry who own/control 2/3 of the productive wealth of the nation. These folks tend to own a lot of everything, and their bonds are getting wiped out. Maybe their timberland is rising in value, but since costs are rising, too, then it's all a wash. Meanwhile, the property taxes are leaping along with valuations, and there's no guarantee that prices will keep up with costs. The same can be said of rental property and other income-producing assets.

The idea that the super-wealthy and super-influential folks who own the politicos will benefit from inflation does not hold water. And so how much pressure do you reckon the politicos will be feeling "to get a handle on this inflation"? I would reckon a tremendous amount--the sort which causes people to lose elections. And since that is the last thing a politico wants, then they will start calling people and demanding that somebody somewhere get a handle on this inflation thing and shut it down.

(Mever mind what happens to the politicos' cherished pork spending when interest rates jump to 15%. The Federal budget will largely go to paying interest, leaving precious little to toss around the home district come election time.)

It seems abundantly obvious that high inflation is not a "solution" to the Treasury's main problem, selling trillions of dollars in new debt, nor is it some sort of windfall for the Plutocracy. And if it's not helpful to the Treasury or the super-wealthy, then why would either allow it to happen? (After all, it's not exactly a mysterious force from space; it's rather terrestrial in origin.) Maybe the answer is: they won't.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, Arthur B. ($25), for your extremely generous contribution to this site. I am greatly honored by your support and readership.

8800/950 or Bust; The Dollar Set To Rise

noreply@blogger.com (Charles Hugh Smith) — Mon, 15 Jun 2009 13:43:00 +0000

A quick glance at the "green shoots" rally is followed by a persuasive analysis of the dollar's strength by correspondent B.C.

The favorite fantasy of the Powers That Be--that the U.S. economy "is improving" and "the worst is over"--requires the "green shoots" Bull Market rally to continue. Yet the melt-up enters its 14th straight week on wobbly legs. Over the past two weeks, the Dow Jones Industrial Average has attempted to close above 8,800 on at least six occasions, and failed to do so each time.

This failure to break through to new technically persuasive highs has been mirrored by the S&P 500, which traded for the past 7 days in an extremely narrow band:

6/4: 942.46
6/5: 940.09
6/8: 939.18
6/9: 942.43
6/10: 939.27
6/11: 944.89
6/12: 946.21

Everyone with even a passing interest in technical analysis has heard that "once the SPX closes above 950 then that will trigger another leg up in this Bull Market." Hence the PTB's (Powers That Be) desperation to stage a close over 8,800 on the DJIA and above 950 on the SPX.

But exactly how much of the "green" in all those shoots have been spray-painted on dying weeds of bad debt? Correspondent U. Doran sent in this article from Bloomberg documenting that the EU has thrown staggering sums at its banking sector: Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP :

European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document.
The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.

In other words, the gargantuan pillaging of public funds in the EU, an economy larger than the U.S., is not even half the amount looted from the U.S. taxpayers. The central banks of the major trading nations have thrown well over $20 trillion (don't forget Chinese and Japanese "quantitative easing"/stimulus) of public funds into their deleveraging, insolvent banking sectors, all in the vain hopes that the unwary public will see spray-painted weeds as "green shoots" of organic economic recovery.

Have you noticed that every day the market threatens to close lower, a sudden "rally" in the last 20 minutes gooses it higher so that it once again closes within an unprecedented narrow band, day after day?

If that isn't manipulation, then why can you set your watch to the daily "rally"? That is hardly a "random walk down Wall Street," is it?

OK, on to the main topic of the today: could the dollar be set to rise rather than fall? Last week I posited in The Dollar Conundrum: Poison or Cure? (June 11, 2009) that the dollar would have to fall in half if not more just to correct unprecedented imbalances in trade and capital flows.

Knowledgeable correspondent B.C. holds the opposite view, and he states the case for a much stronger dollar very persuasively:

I am one of those rare birds who does not buy the US$ disaster scenario. Consider that from the overvalued cyclical levels in '00-'02, the US$ fell ~53% in CPI-adjusted terms. Adjusted for the price of gold, similarly adjusted for the US$ and CPI, the US$ fell 76%. The US$ fell even more in the early '80s adjusted for CPI and gold. In effect, we've had two colossal US$ crashes in less than 30 years. (emphasis added, CHS)
(While many would say that we have emerged relatively unscathed from each episode to date, a closer examination of the underlying productive structure of the economy, and what the Austrians refer to as the "pool of funding", and the situation is much more dire than it appears on the surface.)
Then consider what would happen to the euro were the US$ Index to fall, say, another 50% from ~80. The euro would effectively double to the 2.80s, plunging the European production and export sectors further into a deeper hole than today. And the doubling or more of commodities prices would very likely imply a further decline in global economic activity.
The value of the US$, as with all fiat, credit-money currencies, is determined by supply and demand but also by the relative supply-demand and flows of "things" the fiat currencies can buy. Note that commodities prices over the long term grow roughly at the rate of overall GDP or population plus replacement and capital deepening and the incremental amount of supply-demand inefficiencies or price signal distortions associated with gov't and bankster mischief in the form of growth of bank loans and gov't deficit spending beyond the economy's sustainable growth rate (again, at around replacement or population and the capital required).
Adjusted for the changes in the fiat credit-money US$, commodities prices as reflected by the CRB Index (overweighted by oil) are no higher than they were 34-35 years ago, including at or near the lows since the US$ was removed from gold. One can infer from this currency-adjusted price profile that the supply-demand situation for commodities is generally speaking at equilibrium.

The Chinese shifting some of their US$ reserves to hoarding commodities is prudent, one might say given China's resource demands and runaway, unsustainable growth; but the action creates distortions and artificially stronger short-term demand for commodities transacted in US$'s, which in turn causes a feedback effect to the US$, requiring relatively more US$'s to purchase a given amount of commodities at spot prices (or forward futures prices).
The Chinese hoarding thus causes incremental downward pressure on the US$ where there otherwise would not be given the extent to which (1) US firms have been repatriating US$'s from China-Asia as a result of reducing investment and thus being the proximate cause of China's collapse in exports (which are really in large part goods being shipped from US subsidiaries operating in China); and (2) the money multiplier and velocity are plunging (and even more pronounced when adjusting GDP for total gov't spending), which historically (and my inference) is not coincidentally bearish for the US$.
This sets up the increasing probability over time (perhaps very shortly hereafter) of the price distortions reaching critical mass with China achieving the desired level of hoarding of resources at current prices, setting up the potential thereafter for another collapse in commodities prices (and corresponding firming and rally in the US$) when slower trend global aggregate demand meets with the higher nominal commodities prices and surplus capacity.
I expect just such a scenario to occur later this year and into early '10, including the potential for another commodities and global stock price plunge and flight to the US$ and Treasuries, suggesting that the US$ could more likely rally 25-30% than fall 25-50%. The emergence of sovereign debt and currency crises in the Baltic states, Eastern Europe, and even Scandinavia, the UK, Ireland, and other countries in Europe suggest that UK and European banks, and thus the euro, might be at more imminent risk at this particular juncture than the US$.
I would also add that Mexico's deteriorating situation, including peak oil production and revenues, collapse in remittances from the US, and increasing violence among drug lords increase the risk of Mexico eventually becoming a failed state, which would also create incremental demand for US$'s by wealthy Mexican nationals.
And as I have shared with you before, GDP PPP and flow equilibria among the three major trading blocs, western, Japanese, and Chinese demographics, and long-term resource constraints, i.e., Peak Oil and Peak Everything, going forward implies that, rather than a US$ crash, the more likely outcome is all major fiat currencies will trend toward or around par with one another, whereas nominal commodities prices sometime after the early to mid-'10s begin an inexorable rise against ALL fiat currencies.
Moreover, in this context, I expect that the Anglo-American (and marginally German and Dutch) Power Elite's goal of a global petro-currency or commodities-based proxy in the form of a basket of major currencies is the likely outcome in the long run.
As a bit of an aside, the negative wealth effect from falling real estate and stock prices has resulted in a GDP growth gap of ~25% from potential, which implies that US real private GDP growth is likely to be 0% for the next 4-5 to 8-9 years. Little or no growth further implies little growth bank lending, private investment, profits, and payrolls, suggesting that any "growth" we see in the US economy in the next 5-10 years will occur as a result of low-multiplier and low-velocity borrowing and spending by the federal gov't in excess of the extent to which the private sector continues to contract as a result of the growth gap.
In this no-growth context, consider that the S&P 500 trailing '09 P/E is now 136 (!!!) for reported earnings, and the '09 and '10 P/E versus earnings estimates is 27 and 38, whereas the dividend payout is again below 3%, now at ~2.3% or 150 bps below the 10-year Treasury yield. Moreover, the P/E on the basis of the Aaa- and Baa-rate corporate bond yields and spreads to Treasury yields is implied to be no higher than ~13.
Thus, based on the reported '09 and '10 earnings estimates, the implicit "fair value" (perpetually elusive in real time) for the S&P 500 is in the 300s-400s (US$ constant). Valuations are again arguably back to the delusional "dot-con" levels of the late '90s and at the most recent "echo-bubble" levels in '06-'07, setting up yet another potential for a crash hereafter.
As for QE and deficit spending, the effects will depend in large part on how much of the central bank credit-money reserves actually end up as bank loans/deposits versus in bank holdings of gov't paper to fund deficit spending, and then to what extent the net spending results in a deceleration or increase in the multiplier and velocity.
Japan's BOJ from '96-'97 expanded the monetary base by 12-20% per annum through '03, but real and nominal private GDP did not grow much at all; bank landing was flat to negative; Japanese banks and the BOJ became the lender of last result to the Japanese gov't; outright price deflation persisted after '97; M2+ grow at only roughly the average rate of net incremental gov't borrowing and spending related to social service transfers; and the money multiplier and velocity plunged.
(BTW, most observers, analysts, and pundits are not aware that Japan did not experience persistent price deflation until after '97, the point at which their peak demographic drag effects on housing, consumption, and asset drawdown took hold, as ours is occurring in the US today.)
With our money multiplier and velocity similarly plunging as occurred in Japan in the late '90s to date, with total industry capacity utilization below 70%, and nominal commodities prices firming and again set to bear down on business input and householders' prices and thus profits and spending, price deflation and its drag effect on nominal GDP growth will likely mean persistent deflation remains the likely outcome for the US, Eurozone, and eventually China-Asia.
Goldman Sachs, Morgan Stanley, and JP Morgan going long commodities and index futures (and doing so with funds received from debt and equity issuances, permitted by the respite via TARP) by way of their trading desks and associated sponsored offshore hedge funds, including their leveraged hot money flows to emerging markets, risks raising struggling businesses' and indebted householders' costs, clipping the "green shoots" before they reach ankle height.
Allow me to end by again stating that you have among the most well-written, insightful, and informed Web sites I read on a daily basis. I don't know how you manage to keep it consistently timely and compelling from week to week. I greatly admire your breadth of knowledge, depth of intellect, writing skills, and tireless efforts.

Thank you, B.C. for the kind words and for sharing a persuasive contrarian analysis. Correspondent Michael Surkin, author of the excellent The case for deflation (PDF and podcast), also offered a dollar-positive view:

After reading your piece on the "dollar conundrum," I just had to point out that not everyone believes the dollar is set for significant near-term devaluation. In fact, a few folks (such as myself), hold to the idea that dollar-denominated debt-deflation has barely even started, and that we will see the dollar appreciate massively against all assets, and other currencies, in the next few years.
By the way, this is not just bullish wishful thinking. If deflation really takes hold, as I think it might, then the economy will be reeling from the collapse in asset values, and spiraling numbers of loan defaults.
It is my belief that the recent weakness we have seen in the dollar of recent months is simply a part of the broader bear market rally which is lifting stock, and asset, prices. Sometime later this year, or in 2010, I expect this rally to peter out, and deflation to once again grip the world’s economy (and America in particular) in a vice.

There you have it: the case for deflation and thus a stronger dollar. As I often note: if it were easy to predict the future, we'd all be millionaires.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Of Two Minds reader forum (hosted offsite, reader moderated)

Thank you, Elizabeth R. ($50), for your stunningly generous contribution to this site. I am greatly honored by your support and readership.

Anatomy of a Quadrillion Dollar Scam: Assessing the Damage and Making Our Way in a Post-Gluttony Era

noreply@blogger.com (Charles Hugh Smith) — Sat, 13 Jun 2009 16:54:00 +0000

Correspondent Zeus Y. offers a provocative and deeply insightful context for understanding and resolving the global financial crisis.

Introduction:

Debts are never assets, yet debts have been defined as assets by banks, investment houses, credit card companies, and brokers. If these entities or persons loan you money, they call the resulting debt on your part an asset for them, because you will ostensibly pay them back the principal, with interest, creating profit for them. If you give them money, they must pay you interest (no matter how small), and hence they consider your money a liability. They offset that liability by loaning your money to others at higher interest and pocketing the difference. This used to be what banks did and how they made their money.

With the massive deregulation of financial markets, banks began to effectively merge with investment houses and insurance companies under a rubric of "complete financial services," leveraging and investing money in higher and higher interest ventures, with greater and greater risks, involving huge theoretical profits. These new ventures tended to involve something other than lending, i.e. providing "services" or "guarantees" in the form of default insurance and other promises.

None of these new ventures and products were or are necessary to the credit market, day-to-day business, or efficient economies. Some of these vehicles could, if managed correctly with adequate capital reserves, do some positive things like distribute risk. However, most appear to be simply a boondoggle-- siphoning real value, adding nothing, and substituting a promise of astronomical theoretical future riches for actual ability to pay out. Most have not been managed correctly and have neither had the necessary capital reserves nor prudent investment strategies to shore up those reserves. Predictably, the world financial market is now in free fall.

In this debacle, a profound metaphysical error has emerged--viewing debt itself as an asset. This has fateful and far-reaching practical consequences we are just now beginning to see and assess. Debt adds nothing. It does not produce anything or hold any value. Debt is not the asset but rather the lendee’s ability topay that debt, interest and principal, and, failing that, provide something of real value (collateral) that covers the full amount of the debt. Those are the assets, which the debt-extender holds claim to through a legal contract.

This error of debt-as-asset has spawned a series of wide-ranging and false assumptions about worth resulting in a massive financialization of markets, where derivative financial vehicles based in abstract and theoretical models for assigning value have gained an eerie and superseding reality over actual government managed money supply and concrete value production (stemming from labor, commodities, creativity, intelligence, property improvement, technological innovation, etc.) Let me state this again: This financialization and its vehicles have no basis in actual, concrete assets. (emphasis added: CHS) Their only power lies in their ability to trade theoretical, non-real value (what I call counterfeit value), for things of real value.

This financial "shadow market" is able to do this by deliberately infiltrating and integrating itself into a healthy economic system. Like a parasitic invader, it protects itself from detection by lobbying successfully to subvert government regulation, scrutiny, and enforcement, by claiming itself as "private" and thus immune from public transparency requirements, and by developing mechanisms that are so complex that no one knows exactly what they do or what they might be worth. It works just like any confidence game.

The more financial vehicles one could create, the more "innovative," abstract, and complex they could be, the more fees and profits one could take in, and the less people could question what these entities were selling, the more people had to trust institutional "experts" and their assertions of value, profit, etc. Financial institutions were essentially creating their own counterfeit money through these exotic vehicles as if they had the printing presses right there in their offices.

This is confirmed by widespread statements in the financial press that the value of these vehicles are not “unknown” but rather "unknowable". Many cannot even be traced back to the real assets they were meant to service or represent, including actual deeds to properties that were packaged into "complex" securities. Though the actual dollar value of complex so-called derivatives is not known, the amount in transactions on so-called "derivatives" has been estimated by some reports at over one quadrillion dollars, that is 1,000,000,000,000,000.00 dollars. If only a conservative 2 % fee were charged on these transactions, that alone would amount to a 20+ trillion dollar skim job, and that is laying aside the profit-skimming and greater fees charged in many hedge fund arrangements (i.e. 20% of profits and 5% fees in one case).

The Macro View:

Oddly enough, given the fatal metaphysical error I have mentioned (debt = asset), almost all the concoctions stemming from that error have been "rationally consistent" with the irrational premise. Too bad logical consistency with false premises will virtually guarantee disastrous conclusions. Let us spell out in detail this "rational" behavior stemming from irrational assumptions.

First let us recast traditional debt in tune with the new, false assumptions mentioned above. In traditional economics, "good" debt would be a loan extended to someone with sterling credit, with a healthy income or revenue stream, and collateral that far exceeds the value of the loan. Collection is fairly simple. Risk is transparently low. The interest rate charged would be correspondingly relatively low. "Bad" debt would be someone with a low to middling credit rating, with borderline income or revenue, and with collateral that flirted with being equivalent to the loan. Risk is transparently higher. The interest rate charged would be correspondingly higher to offset the greater risk of default and failure to recoup the full value of the loan. "Insane" debt, would be someone with an incredibly low or no credit rating, whose income or revenue is well below what is necessary to pay off the loan, and whose collateral property has no, or even negative, equity in it (think of houses bought with liar loans, balloon loans, negative amortization loans).

In a traditional system, people with "insane credit" would never get a loan, because they have no way of paying it, and they do not have collateral worth anything near value of the loan. In the new system, debt is "equivalized" so that what I have called "insane" debtors actually become the most sought after market! Why? Think about it: No distinction is being made between debts that can be paid and those that cannot possibly be paid (at least without completely fantastical projections of increasing value in the property, commodity, stock, etc. upon which the loan is being drawn). All debt is seen as asset. Insane debt = bad debt = good debt = asset. This is confirmed empirically in Moody’s rating of absolute junk as secure AAA investment.

The lousier and more untenable the loan, the greater the "risk", therefore the greater interest and fees one can charge on it, and therefore the greater the ostensible return and/or profit! Combine this with the ability to externalize or pass on the liability by selling the insane loan or insuring it against default, a lender or servicer has every incentive to hand out the worst possible loans because they generate the highest fees and interest rates. "But," you may protest, "there are no foundations or fundamentals underneath these deals. They are completely irrational." In this new system, there don’t need to be fundamentals because mathematical models can now simply create and assign present value based on theoretical projections of future values accepted as if those future values were fact.

So all the incentive is toward expanding the market for heavy, pervasive debt that is impossible to pay, and then to further spawn lucrative financial derivatives (including servicing and guaranteeing loans) from that market. Add consumer industries to this balloon, like housing and automobile manufacturing that benefit from this false creation of equity based on future value, and you have a juggernaut. This house of cards is perpetuated by its own "new era" mythology ("values will always go up," "deficits don’t matter") and the fact that everyone seems to be getting richer from the loan originator to the lendee/investor—the brokers, the servicers, the appraisers, the realtors, the county property tax assessments, the furniture store owner, the homeowner.

If this situation weren’t bad enough, a new hyper-catalyst enters the picture--leveraging. Two major problems emerged here to magnify many thousand or millions fold the damage already levied by fraudulent and fantastical lending. First, unregulated private companies (equity firms, hedge funds, etc.) were able to fabricate wealth and inflate their holdings and net worth to either further invest or buy outright real companies, as Cerberus did with Chrysler. Their unregulated "money" was based in "equity" based on "marked to model" theoretical value.

Second, unregulated financial instruments like credit default swaps had no effectively no reserve requirement at all, because their reserve "money" was also based on "assets" based on "marked to model" theoretical value. Furthermore, this unregulated, self-assigned value could be, if they so desired, leveraged into investments in ratios that could defy infinity. As we know, zero multiplied by a million is still zero. Imagine if you or I could assign a 200 billion dollar asset value to our dog’s house, and use this assigned value to buy a major international conglomerate.

When people say that this is "unthinkable," what they are really saying is, "I don’t want to think about it. I don’t want to acknowledge this happened or can happen." However, just connect the dots. It’s simple. Is there anything preventing this from happening. No. Applicable regulations have been removed, and those still on the books have not been enforced. Is there any reason not to do it given the incentives and principles at play? No. Therefore, it will happen.

What we have is essentially private, unregulated money creation prompting hyperinflation in certain markets. We have an intensely large, and at this time, unknown amount of counterfeit money and value mixed in with the real. Apparently we cannot tell real money apart from counterfeit money very easily, and/or we are trying to hide the counterfeit cash through deficit bailouts from the taxpayers.

We also know that we cannot keep these fraudulence-based markets (i.e. housing) artificially inflated because they are so out of line with reality-based fundamentals and facts. However, we also largely do not have the grit to face the consequences of this rip off. So our interim strategy appears to be to try to ease into austerity by hiding the deficits, allowing companies to continue to mark to model, holding foreclosed houses off the market, etc. It is a common and understandable (but not excusable) human response. It won’t work, and it will both deepen and elongate the painful coming to terms.

Even money markets fell below 100% of principal. Think about that. That’s unprecedented in its scale and severity. You don’t need a canary to tell you what is going on. There has been a massive liquidity drain. Money has disappeared and been replaced with fraudulent substitutes of value. I’ve mentioned in other essays that this situation will eventually require massive debt forgiveness. Fraudulent or concocted wealth begets fraudulent debt. So we should come to terms with the necessity of debt erasure for larger swathes of the globe. The instigators have unfortunately, not only already been forgiven, but been rewarded with hundreds of billions of dollars of bailout money. Accountability, if it ever happens would demand these instigators go bankrupt, face criminal prosecution, and supply restitution, including returning their private, ill-gotten gains.

The Micro View:

How does this profoundly twisted macro mentality play itself out on the micro level? Let’s look at some examples:

Credit card companies

Many people are aware that those consumers who pay off their credit cards every month are a liability to the credit card company. They get a short-term loan at no interest on a no-fee credit card (though the credit card company does charge a fee to the vendor). So credit card companies don’t like those who pay off their cards. Furthermore by paying up, you, the borrower, have wiped out the credit company’s "asset"—debt. They need someone who preferably misses a payment, so the effective interest rate can kick to 30 – 35%, someone who only makes the minimum payment, so the principal debt increases over time (enlarging the "asset"), and someone that will always pay the minimum payment even if they can never pay off the card.

Again the most desirable client is one who has the worst financial habits, not the one with the best. There is a reason that someone who carries a balance gets a higher credit score than someone who pays off the balance. All is swell at least until that underwater client defaults with thousand of others. Not even the industry written bankruptcy "reform" will hold the tide as that happens in increasing numbers.

Banks

Banks, in this "new era," expanded their traditional lending operations into broader "financial services." There was more money to be made and more market share to grab by creating a whole new host of products built around "servicing" loans (rather than just collecting them), providing financial advice, and establishing credit lines. Especially as money becomes cheaper and cheaper (i.e. the Federal Reserve sets effective bank lending rates near zero), the effective marginal profit from straight lending dwindles. Banks cannot pay anything lower than a quarter percent to savers, and competition forces the lending percentages down. Since traditional reserves are based on capital from savings (considered a liability), the pressure mounts to find a way to "capitalize" through debt.

So banks "branched out" in tune with "successful" lobbying and deregulation. This created both conflicts of interests and dangerous precedents, effectively merging banking with insurance and investment brokering. Maintaining capital reserves became a quaint notion because money lying around was so "unproductive." A myth arose that money would always be there and interest always low. This myth has proven, of course, false. Even with low interest, there is now a liquidity crisis, because real wealth was siphoned off by unproductive and no-value-added services, either stored as private wealth in opaque Swiss bank accounts, invested in worthless crap (like credit default swaps), or dumped into plunging markets (like housing).

Credit default swaps (CDS’s)

I’ve already written many essays on this subject, so I will only summarize the transparent fraud perpetrated under these "vehicles." CDS’s are unregulated insurance against defaults on loans. Though the mechanisms have not been officially investigated and audited, it does not take a genius to conclude that AIG and others could "guarantee" loans and receives premiums for nothing, that is, without actually possessing any reserve capital or exchange service at all. Using their once respected reputation as collateral, and dubious investments conveniently and generously assigned value by their own accountants, these institutions could create cash flow without providing anything in return except assurances. No wonder these vehicles were so attractive.

This would be like you or me receiving nice batches of money from our neighbors to insure against their houses being destroyed by fire, using our own house as collateral, with all of us living in the middle of a tinder-dry pine forest. The fire simply is going happen sooner rather than later with these conditions (akin to the poor fundamentals in the economy), and you and I won’t have anything left with which to pay others. However, we will have a huge private stash created by the fees and premiums we have charged and the bonuses we’ve given ourselves. This, at least, could help us rebuild our own mansions.

Housing

According to any kind of fundamental analysis (see Patrick.net for a good summary) the transparent irrationality of house prices could not have been clearer. Real incomes have been flat or declining over the last decade, even though productivity rose substantially. Purchased houses in overheated markets required monthly payments three times what is would cost to rent the same house. Some people were paying as much as 10, even 20, times their salaries to buy a house. (I remember a newspaper report of a 750,000 dollar house bought on a 40,000 dollar/year salary.) Reporting and underwriting requirements simply disappeared on the false conviction that "housing prices will always go up in the new era." Of course this could not be sustained, any more than an actual house could be supported on a foundation of air (without the fitting metaphor of balloons as in the new Pixar movie Up).

Stocks

Stocks were bound to fall as well, since they were being inflated by a number of factors related to the outright greed and entitlement created by this "new era" thinking. First, many companies who once only manufactured products decided to financialize themselves, i.e. GM, which went from only manufacturing cars to providing GMAC financing. Second, chief executives found their huge bonuses tied to stock prices, so they found ways to manipulate demand/value, and thus stock prices, by buying up their own stock, or better yet by leveraging their assets 30 to 1 to expand business, merge with other companies in huge multi-billion dollar deals. Great paper profits mean great bonuses even when you are cannibalizing stability.

Third, housing and other irrationally inflated sectors provided stockpiles of illusory consumer equity and short-term job growth, encouraging a consumer spending orgy on a range of goods and services that buoyed the economy. Fourth, for eight years a presidential administration and its entire executive branch allowed industries to write environmental laws allowing for indiscriminant toxification of the environment, waste in energy, and pliant, absentee oversight in agencies like the Security and Exchange Commission. We are now coming to terms with the fact that environmental and economic limits are and will continue to force a decline in manufacturing and sales. Those cut GM dealerships and factories are not coming back.

Conclusion:

Believe it or not, the exposure of these falsehoods and a return to real economy should be the basis for optimism not pessimism. I, for one, am only too eager to leave behind the anxiety mixed with empty hedonism of a debt-driven economy. We now have a pressing need to commit to creativity, transparency, honesty, accountability, and real prosperity. Our Greek tragedy lies not only in the economic hole our irrational binging has left us with, but the moral, physical, environmental, and character hole. It is no surprise to me that skyrocketing obesity, approval of torture, toxic crap from China, the burying of a perfectly functioning electric car (GM’s EV-1), and the out-of-control cost of sick profiteering (mistakenly called health care) all happened to attend this delusional phase of our economy.

We now have a chance for real quality of life based in those important things we have been neglecting—love, friends, family, community, healthy eating and farming, breathing clean air, drinking clean water, making an honest living, working hard, and learning about our world and each other. We are recovering from a long illness symptomized by a suicidal, selfish, unreflective, and exploitative egoism. If we take advantage of this opportunity, refuse to listen to self-interested "experts" who seem to care about nothing but their own obsolete authority, money, and power, we can move toward single-payer health insurance, sustainable, organic, community-focused agriculture, demilitarization, economic equity, more leisure time, and a diverse, interconnected global citizenry. For too long "national interest" has been associated with using others instead of respecting them, foisting consequences on future generations instead of working together to co-create a healthy, vital world. Now we have a choice. It is time, given our current and profound lesson about the alternative, to make the right one.

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