oftwominds

Why Interest Rates Will Rise in 2010

noreply@blogger.com (Charles Hugh Smith) — Thu, 24 Dec 2009 14:45:00 +0000

Interest rates, artifically suppressed by the Federal Reserve and China, are about to start rising, and will continue rising for a generation.

On Christmas Eve 2009, I wish I could parrot the "happy-happy" Party Line that interest rates and mortgage rates will stay low for essentially ever, but that would require lying. The truth is the drivers of super-low interest rates are diminishing, and the forces of higher rates can no longer be restrained.

There have two primary drivers of super-low interest rates: The Federal Reserve and the Chinese buying Treasury bonds.

The Fed has created massive artificial demand for more U.S. debt in two ways; by direct purchase of bonds being auctioned (During the first 2 months of the new fiscal year, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt) and by secretly buying Treasury bonds from "primary dealers" (banks) a few days after the auction.

This way, it appears for propaganda purposes that some private parties are actually buying T-bills to hold, when in fact they are only temporary proxies for cloaked Fed purchases.

The entire "package" of Fed buying of Treasury debt to keep interest rates low runs in the hundreds of billions--The Fed’s balance sheet ballooned to $2.24 trillion in assets as of last week, up 142 percent from the beginning of 2008. The Fed purchased outright $300 billion of longer-term Treasury securities, $1.2 trillion toxic-garbage mortgage backed securities no sane investor would touch, and hundreds of billions more in Treasury debt via proxy buyers.

And now as the Fed ends some of its lavish support of the Treasury debt, Congress and the Obama Administration are stepping up their borrowing to unprecedented levels:

Taxpayer Burden Eases to $8.2 Trillion as Obama Supplants Fed.

So just as the Fed cuts back its purchases of massive new Federal debt, the Federal government is borrowing more? And who, pray tell, will be the "buyer of last resort" as the Fed trims its buying?

Not the Chinese Central Government: China's Dumping Of The Dollar Has Begun.

Here is the key dynamic to China's purchases of Treasury debt: when China's trade surplus with the U.S. was expanding into the hundreds of billions every year, the Chinese needed a place to park all those dollars. U.S. Treasury bonds were liquid, supposedly safe and available in limitless quantities.

Keeping interest rates cheap for their American "consumer" debt junkies made good sense as well. Niall Ferguson: How China's Insane Fiscal Policies Pumped Up Chimerica And Crushed America.

But now the gargantuan trade surpluses are shrinking, and the torrent of dollars has diminished. Standard-issue financial pundits (SIFPs) have been cheering the declining U.S. trade deficit, but they should be careful what they wish for: once the U.S. is no longer running a huge trade deficit, then all those exporter nations will no longer have hundreds of billions of dollars floating around, looking for a home in Treasury bonds.

China's trade surplus to US to narrow (12/7/09)

According to China's General Administration of Customs, China's exports from January through October dropped by 20.5 percent compared with the same period last year. During the same period, its export volume to the US dropped by 11.3 percent, while the export price declined by 5.3 percent.
China-US trade volume decreased by 15 percent, according to Chinese customs.

China trade surplus shadows Obama visit (Nov. 2009)

China's trade surplus with the U.S. was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.
Bilateral trade with the U.S., China's second-biggest trading partner in the period, is down 14.8% in the first 10 months this year, to $239.36 billion. Two-way trade with close neighbor Japan, China's third-largest trading partner, has crashed 19.3% in the period, to $182.34 billion. Business with the European Union, China's biggest trading partner, has suffered almost as badly, declining 18.7% in value to $292.42 billion.
China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world's largest holder of US Treasuries outside the United States, according to the US Treasury Department.

Here are the official U.S. trade statistics with China: Trade with China

Trade deficit 2007: -258.5 billion

Trade deficit 2008: -268.0 billion

Trade deficit 2009: -188.5 billion (est.)

In addition to having fewer dollars to park in T-bills, China has (as noted above) started trimming their holdings of long-term Treasury debt.

OK, let's add this up: the two primary sources of demand for new Treasury debt are scaling back or even dumping their holdings, while supply of new Treasury debt is increasing at record levels.

According to the laws of supply (increasing rapidly) and demand (falling), the Treasury's ability to palm off hundreds of billions in new debt every few months is about to outstrip demand by a long shot.

The only way to increase demand will be to raise interest rates, which will then spread to all layers of the economy. All interest rates will rise, including mortgages.

There really is no escape from this conclusion. And this isn't just about 2010--it's about 2010 through 2035, as bond rate cycles tend to run between 18 and 26 years. Just as interest rates fell for 26 years, now they will rise for a generation or so.

Short-term Treasury yields fell to near-zero in the global financial meltdown, but the basic idea of this chart remains valid: interest rates fell as Chinese ownership of U.S. debt skyrocketed. Once that ownership starts falling (along with Fed purchases), interest rates have nowhere to go but up for decades to come.

For those who think the newly frugal American household or corporation will step up and buy the $1.4 trillion in new debt and the $2 trillion in debt being rolled over each and every year--dream on. According to Niall Ferguson in An Empire at Risk:

Unfortunately for this argument, the evidence to support it is lacking. American households were, in fact, net sellers of Treasuries in the second quarter of 2009, and on a massive scale. Purchases by mutual funds were modest ($142 billion), while purchases by pension funds and insurance companies were trivial ($12 billion and $10 billion, respectively). The key, therefore, becomes the banks. Currently, according to the Bridgewater hedge fund, U.S. banks' asset allocation to government bonds is about 13 percent, which is relatively low by historical standards. If they raised that proportion back to where it was in the early 1990s, it's conceivable they could absorb "about $250 billion a year of government bond purchases." But that's a big "if." Data for October showed commercial banks selling Treasuries.
That just leaves two potential buyers: the Federal Reserve, which bought the bulk of Treasuries issued in the second quarter; and foreigners, who bought $380 billion. Morgan Stanley's analysts have crunched the numbers and concluded that, in the year ending June 2010, there could be a shortfall in demand on the order of $598 billion—about a third of projected new issuance.
Of course, our friends in Beijing could ride to the rescue by increasing their already vast holdings of U.S. government debt. For the past five years or so, they have been amassing dollar--denominated international reserves in a wholly unprecedented way, mainly as a result of their interventions to prevent the Chinese currency from appreciating against the dollar.
At the peak of this process of reserve accumulation, back in 2007, it was absorbing as much as 75 percent of monthly Treasury issuance.

Our excellent confrere Jesse at Jesse's Cafe Americain addresses the same question with different sources and insights, but arrives at the same conclusion: Who is Buying All these US Treasuries (and can they keep it up in 2010)?

So if the Fed and Chinese cut back, due to not having more dollars to squander on T-bills or from various other constraints, then the pressure to sell Treasuries at whatever the market demands could cause rates to explode higher, to the surprise of virtually all observers.

Except Jesse and us, of course. We will only be surprised if they can keep the game going much longer.

I wish you all a safe and Happy Holiday--next post 12/28/09.

Permanent link: Why Interest Rates Will Rise in 2010

Excellent new essay in Readers Journal:

The Real Con: "More Complex Is Better" (Michael M.)

Things are getting more and more complex in today's world. That is a statement few would doubt.
However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?
The real con of today is "more complex is better."

The Real Con: "More Complex Is Better" is chockful of interesting and provocative ideas.

Recommended books and films has been updated--take a look.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you can read the Kindle version of Survival+ on your PC.

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

Thank you, Terry L. ($10), for your kind words of encouragement and very generous contribution to this site. I am greatly honored by your support and readership.

"Monetary Policy" Transfers Your Children's Future Earnings to the Financial Elite

noreply@blogger.com (Charles Hugh Smith) — Wed, 23 Dec 2009 15:06:00 +0000

The bail-out of Wall Street and the banking and mortgage industries is not monetary policy; it is a massive transfer of wealth from future taxpayers to the Financial Power Elite.

The monetary-policy terminology of "quantitative easing" and "bail-out" is a masterstroke of propaganda, for it purposefully masks an unprecedented transfer of wealth from future taxpayers to the Financial Power Elite.

I want to be crystal-clear here: what Bernanke & Co. represent as "monetary policy" is in fact a massive transfer of wealth from future generations of U.S. taxpayers to Wall Street and the banking/mortgage industries.

The propaganda is purposefully designed to distract our attention from the fact that "monetary policy" has fiscal consequences for future taxpayers--unprecedented mountains of Federal debt which must be serviced over a generation in which interest rates will rise.

Various SIFPs (standard-issue financial pundits) are trotted out as shills to support "quantitative easing" and "bail-outs" as "sound monetary policy" to ward off Depression. Yet what did squandering $1.2 trillion on toxic mortgage-backed securities actually gain the nation? What did squandering several trillion dollars on bailing out AIG, Wall Street, the banks, Fannie and Freddie, GMAC, etc. etc. etc. actually gain the nation?

Perhaps the only "depression" that was averted was the depression the Financial Power Elite would have experienced had their empires of leverage and derivatives been allowed to fall, eradicating their ill-gotten wealth in the process.

The goal of propaganda is to redirect attention away from the truth via misinformation and the construction of plausible, emotionally appealing facades--simulacra in the Survival+ analysis.

Thus the transfer of trillions from your childrens' future earnings is masked behind the seemingly harmless and cost-free facade of "monetary policy."

Another Survival+ concept in play here is complexity fortress. Bernanke and Co. have constructed a complexity fortress, hiding their actions behind veils of secrecy (all "for the good of the nation," heh, as if transparency was the enemy of democracy and free speech), obfuscated transactions (purchasing futures contracts via proxies, and so on) and the sheer complexity of structures such as TARP.

If the web is too tangled for anyone but insiders to understand, then the complexity fortress is complete and invulnerable.

This was of course a favored strategy of Wall Street--derivatives so complex that only those who wrote them understood the risks.

There is another facet to this propaganda campaign of masking fiscal burdens on citizens behind the bland mask of "monetary policy": the complete destruction of integrity and ethics in the halls of power.

Ethics receives lip service in the U.S., of course, along with other fictions such as "fiscal responsibility," but that faint bleating is itself a sort of veil over the bleaker reality that integrity and ethics have been entirely marginalized in the public culture of the nation.

Were anyone to actually resign in protest or disgust, they would be cynically castigated for throwing away wealth and power in a needless gesture. As for ethical breaches-- everyone knows a phony apology ("I am sorry I hurt my family and my wife, I take full responsibility, blah blah blah") is all that's needed. After a brief pause to allow the news cycle to wander past, they can resume the pillaging of the public coffers, the fraud, embezzlement and legerdemain that have been raised to a state of perfection in the halls of power.

In other words: integrity is for chumps. This marginalization of integrity, both institutional and individual, is a key element in the Survival+ analysis.

Thus we have Bernanke & Co. stand before us with straight faces, even as they know their policies are enriching the few at the cost of the many taxpayers who are safely in the future. That we as a nation are stealing from our children and grandchildren to avoid any housecleaning now--that doesn't bother Bernanke & Co., nor does it bother the senators who are biding their time, awaiting the moment where they rubber-stamp the pre-approved apparatchiks.

This marginalization of integrity in the halls of power has infected the entire nation; those below look up and see fraud, corruption, lies, propaganda and self-serving aggrandizement, and they conclude that ripping off the taxpayer, pursuing fraudulent claims and mortgage documents, etc. etc. is in essence the "officially approved" manner to get ahead.

True to the high standards of propaganda which now pass as "normal," this erosion of truth and integrity in official statements, statistics and policies is vehemently denied by those in power.

The costs of this erosion cannot be tallied easily, but we can predict they will be paid out over many years, if not a generation and beyond.

Permanent link: "Monetary Policy" Transfers Your Children's Future Earnings to the Financial Elite

Excellent new essay in Readers Journal:

The Real Con: "More Complex Is Better" (Michael M.)

Things are getting more and more complex in today's world. That is a statement few would doubt.
However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?
The real con of today is "more complex is better."

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

Thank you, Thorin S. ($40), for your outrageously generous contribution to this site. I am greatly honored by your support and readership.

Symbolic Economies: U.S. and China

noreply@blogger.com (Charles Hugh Smith) — Tue, 22 Dec 2009 19:32:00 +0000

The symbiotic partners of "Chimerica" both present symbolic economies which mask the structural rot in their real economies.

I am indebted to Australian analyst John Craig of the Centre for Policy and Development Systems for the concept of a symbolic economy which is presented as "evidence" of "healthy growth." Behind the symbolic facade, the real economy is devolving toward structural implosion.

Such a substitution by the Power Elites/State partnership of symbolic prosperity for broad-based, real prosperity is what I term a simulacrum of prosperity in the Survival+ analysis.

For China, the symbolic economy is a highly suspect GDP growth rate of 8%, mostly fueled by stupendous Central Government stimulus and unprecedented borrowing. Correspondent B.C. submitted this article China May Have 8 Trillion Yuan in New Loans in 2010 (Bloomberg) and this commentary:

Lenders, under government pressure to finance part of the nation’s 4 trillion yuan stimulus plan, advanced a record 9.21 trillion yuan of new loans in the first 11 months, more than double the amount offered in the same period last year.
~30% of GDP for two successive years and 150% growth in two years?
This would be equivalent to the US expanding bank lending by $11T from '08 to '09-'10.
Assuming the bank loans/GDP ratio, US GDP would have been reported to have grown $21 trillion in two years.
The growth of China's lending is at a compounding doubling rate of 18 months. That's right, in 18 months.
This puts China's money velocity below 1.0 and the multiplier at ~0.9.
Virtually nowhere does one read in the financial press the full extent of the absolutely mind-blowingly extraordinary runaway credit expansion occurring in China. There is simply no precedent in modern economic history for a country to have expanded lending at such a rate and share of GDP in such a short period of time.
That all other more "modest" episodes throughout history resulted in the greatest bubbles and subsequent crashes in world history, we are potentially witnessing (without most of us knowing it, apparently) the prelude to a China crash that will become a financial and economic black hole into which the entire global economy is consumed.
There is absolutely NO WAY that bank lending doubling in 18 months can be prudently and efficiently intermediated.
This kind of growth of lending, production, and hoarding of commodities is akin to a full-out war mobilization effort; a kind of last surge of production and laying up of stores before the armor is put on; the women and children are safely put out of harm's way; the blades and arrow tips are carefully sharpened and honed; the breast is thoroughly beaten and war cries sufficient to summon the gods of war; the necessary sacrifices are made to the gods; and the gates of the fortress are flung open, and the well-fed dogs of war are unleashed upon the enemy.

Thank you, B.C. As noted elsewhere in the blogosphere, much of this gigantic flood of borrowed money has flowed into

1. questionable infrastructure projects

2. a massive expansion of capacity in industries which already have too much capacity

3. empty malls, towns, luxury condos and other buildings, reinflating China's real estate bubble.

In the U.S., unprecedented Federal borrowing and bailouts have created a symbolic economy of the stock market rally and bogus "recovery" statistics.

Even as measurements of the real economy show structural devolution (tax receipts continue to plummet, incomes and hours worked remain at Depression levels, jobs are still being lost, etc.), the stock market's 70% rise is in effect the symbolic evidence that the "economy is recovering." Behind this symbolic facade, the real economy lies in ruins.

How can GDP be growing at a robust 3.5% clip (oops, already adjusted down to 2.7% a few weeks ago and now it's been adjusted down again to 2.2%) while employment and tax receipts are both falling? The answer: statistics are ginned up to support the symbolic economy of recovery, rising corporate earnings and a "new Bull Market" in stocks.

As a reader noted here earlier in the year, the stock market is the sole accomplishment of this administration and Congress. Without the "feel good" "New Bull Market," then the emptiness of the real U.S. economy would be in full view.

The Powers That Be might be questioned at that point, so a facade of "recovery" and a rising stock market are presented as a symbolic U.S. economy.

Take the Chimerica facades for reality at your peril.

Permanent link: Symbolic Economies: U.S. and China

Excellent new essay in Readers Journal:

The Real Con: "More Complex Is Better" (Michael M.)

Things are getting more and more complex in today's world. That is a statement few would doubt.
However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?
The real con of today is "more complex is better."

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

Thank you, Kent M. ($40), for your exceedingly generous contribution to this site. I am greatly honored by your support and readership.

Purchasing Power: The Only True Measure of Earnings And Wealth

noreply@blogger.com (Charles Hugh Smith) — Mon, 21 Dec 2009 16:21:00 +0000

Let's start our discussion of purchasing power with a recent comment by frequent contributor Harun I.

In Why a 35% Decline in Housing Values Would Be Good for the Nation (December 15, 2009) I wrote: "Borrowing trillions to pay out-of-control price spirals will lead to national insolvency. There is no other end-state."

Harun submitted the sentence modified thusly:

"Borrowing trillions which leads to out-of-control price spirals will lead to national insolvency. There is no other end-state."

Harun also offered this explanation:

Any positive growth rate in the currency will result in a collapse of the currency. The rate may be stated at some seemingly benign level (2.5%) but that means the money supply doubles every 28 years, and does so until the amounts are staggering. This embedded feature of current economic dogma is never discussed openly by its practitioners and is not understood by the public whom they serve.
Health care and education spiraling costs are effects not causes. The price spirals are the result of destruction of the currency's purchasing power. Unfortunately, Washington is convinced that the "fix" is in government restructuring of these industries. It is because they either do not understand or willfully ignore the consequences of the exponential effect of expanding debt-as-capital that insolvency will occur. Insolvency will occur because due to the nature of exponential growth/collapse, by the time it is realized a problem exists, it is already much too late.

As longtime readers know, Harun has often shared an analysis based on purchasing powerrather than nominal valuations or concepts such as inflation/deflation, which so often end up further muddying rather than clarifying the measuring of our earning power and wealth.

For instance: take the value of the U.S. dollar (USD) in 1914, 1919 and now. According to the Bureau of Labor Statistics handy inflation calculator, a 1914 dollar equals $21.63 in 2009 dollars, while a mere five years later, the 1919 dollar equals only $12.50 in today's USD.

This raises a number of questions. Are we as a nation wealthier in terms of purchasing power and earnings than we were in 1914? In other words, even though today's dollar is only worth a nickel in 1914 money, can a citizen buy more FEW resources (food, energy and water) with an hour's labor today, despite the massive decline in the dollar's nominal loss of value?

Put another way: if a laborer earned 10 cents an hour in 1914 and paid no income taxes, and bread was a nickel a loaf, his/her purchasing power was 1 hour = 2 loaves of bread.

If bread is now $3 a loaf and a laborer earns $12/hour and pays $3 in income and Social Security taxes, leaving $9, then 1 hour = 3 loaves of bread.

Regardless of the nominal value of the currency, the laborer has greater purchasing power today.

Between 1914 and 1919, the dollar lost a staggering 42% at least measured nominally. (Recall that World War I lasted from August 1914 to November 1918.) Did wages rise 42% in those five years? If so, the rise in wages offset the decline in purchasing power of the dollar. If wages did not rise 42% (and while I cannot find any spreadsheet for those years, my sense is wages did not rise that much), then wage earners lost considerable purchasing power in those few years.

This could be phrased in a number of ways: if money supply growth exceeds GDP growth, then the currency loses purchasing power.

This is partly why discussions of "inflation" and "deflation" are so often fruitless.Clearly, "inflation" ate up 95% of the nominal value of the 1914 U.S. dollar. But if the purchasing power of an hour's wage rose, then what can we conclude?

If income/wages fall faster than deflation, purchasing power also declines.

The rapid decline in the dollar's value in the five years between 1914 and 1919 reveal how the real question is not how much did the nominal value change, but how did the purchasing power of wages change.

This focus on purchasing power, and on growing one's purchasing power, is a key focus of Survival+. (Yes, Survival+, once again.)

Correspondent Micah Zuorski submitted a brilliant concept: an Excel spreadsheet for calculating purchasing power.

Here are Micah's comments, and the instructions you will find upon opening the spreadsheet:

I just finished reading Survival+ a couple of days ago, and I've been thinking about what you wrote about considering the value of assets in terms of how many loaves of bread you could buy with them. I thought about how hard it could be to visualize the development of purchasing power over time, and so I built the attached spreadsheet that I believe will make it easy for someone to see their own value in terms of FEW resources over time.
It should be easy for anyone with novice skills in Excel to use, and I think it will make it easier for the user to visualize the relative volatility of some FEW resources and to track whether or not they are actually becoming any wealthier as they accumulate money.
Instructions on using the spreadsheet: The only cells you need to fill in are the green ones. The cells at the top of the page are for assessing your own wealth in dollars; type in the amount of money you hold in each category (insert more categories as needed). They will automatically total below the column. Next fill in the current costs of the resources in the green row. The number of units of each resource that you could currently purchase with your total wealth will be automatically calculated in the yellow row. Next, paste the values from the yellow row (use Paste Special) into the row representing the current month, and your purchasing power in terms of each resource will appear in a chart on the tab marked 'Charts'. As you refill the green cells every month and update the charts, you will see your real purchasing power in various resources evolve over time.

Thank you, Harun and Micah. I am confident from our email correspondence that Micah considers this spreadsheet a work in progress. Feel free to play around with it as a way of escaping unfruitful concepts and exploring the measure of purchasing power.

Permanent link: Purchasing Power: The Only True Measure of Earnings And Wealth

Recommended books and films has been updated--take a look.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

Thank you, Amaze Productions ($10), for yet another generous contribution to this site. I am greatly honored by your support and readership.

Gift Ideas: Books for 2010 and Beyond

noreply@blogger.com (Charles Hugh Smith) — Sat, 19 Dec 2009 18:44:00 +0000

There are hundreds, if not thousands, of worthy books on the coming intersecting crises and how we can prepare ourselves to survive (and perhaps even prosper). I do not claim to have a comprehensive knowledge of all the competing titles, but I can recommend a few that are on my shelf, and list some titles which oftwominds.com readers (a very smart selection of The Remnant, as you know) have recommended.

For a firm grasp on the basic context of our era:

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

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

Survival+: Structuring Prosperity for Yourself and the Nation

Yes, it is presumptuous to place my own book with those of my mentors, but as we all know, we stand on the shoulders of giants...

Here are a few of the many worthy source books. As to which is "more important," it is a matter of taste and perspective.

The Long Descent: A User's Guide to the End of the Industrial Age

The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization

The Fourth Turning

The Great Wave: Price Revolutions and the Rhythm of History

Collapse: How Societies Choose to Fail or Succeed

The End of Work

Sustainable Energy - Without the Hot Air

Globalization and Its Discontents

Four Arguments for the Elimination of Television

Planet of Slums

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

Smells Like Dead Elephants: Dispatches from a Rotting Empire by Matt Taibbi

Self-reliance and Sustainable Prosperity

Of the many worthy books on survivalist/self-reliance topics, this one is the most comprehensive in my opinion: When Technology Fails: A Manual for Self-Reliance, Sustainability, and Surviving the Long Emergency by Matthew Stein.

This book covers not just emergency preparation but water issues (graywater, etc.), food growing, foraging and storage, shelter, first aid, "when high-tech medicine fails," clothing, energy, heat and power, metalworking and machinery, and much else. The book includes many resources for further investigation, diagrams and even sections on intuition and decisionmaking. It is a practical guide with what I call an integrated understanding of the choices facing each household.

My goal in writing Survival+ was to lay out the framework for understanding why the status quo is doomed to insolvency, and to lay out how the solution requires constructing new resilient communities and networks which are independent of global corporate and State plutocracies. There are few books which address this adequately, but there are many which focus on household preparation/sustainability. To list but a few:

Just in Case

The Urban Homestead: Your Guide to Self-sufficient Living in the Heart of the City
I learned a lot about urban gardens from this book. Not a comprehensive guide to all things gardening but practical for a short book.

Depression 2.0: Creative Strategies for Tough Economic Times
Disclosure: I contributed a chapter to this book.

Depletion and Abundance: Life on the New Home Front

Readers have recommended/purchased with "Survival+":

Five Acres and Independence: A Handbook for Small Farm Management

Food Security for the Faint of Heart

How to Build Animal Housing: 60 Plans for Coops, Hutches, Barns, Sheds, Pens, Nestboxes, Feeders, Stanchions, and Much More

The Modern Survival Manual: Surviving the Economic Collapse
written by an Argentine, based on what he learned enduring/surviving that nation's catastrophic financial collapse. I have read his website/earlier work and found it practical though harrowing. Good for those who want to prepare for TEOTWAWKI.

How to Survive the End of the World as We Know It
This guide by respected blogger James Wesley Rawles is a best-seller among the many titles on survivalism, for good reason.

Wilderness Evasion: A Guide To Hiding Out and Eluding Pursuit in Remote Areas

The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments

A Nation of Farmers: Defeating the Food Crisis on American Soil

Gardening When It Counts: Growing Food in Hard Times

Storey's Basic Country Skills: A Practical Guide to Self-Reliance

Special fiction recommendation: Yes, I am a biased observer, as Chris Sullins' gripping strategic action thriller was first serialized on this website:

Operation SERF

Diet, Nutrition and Health

Food, Inc. (documentary film)

The China Study: The Most Comprehensive Study of Nutrition Ever Conducted and the Startling Implications for Diet, Weight Loss and Long-term Health

The End of Overeating: Taking Control of the Insatiable American Appetite

The Omnivore's Dilemma: A Natural History of Four Meals

Diet for a Small Planet

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

Finance/Economy

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Fiasco: The Inside Story of a Wall Street Trader

Reminiscences of a Stock Operator

Confessions of an Economic Hit Man

The Misbehavior of Markets

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

End of the Line: The Rise and Coming Fall of the Global Corporation

Nickel and Dimed: On (Not) Getting By in America

The Sovereign Individual: Mastering the Transition to the Information Age

Age of Propaganda: The Everyday Use and Abuse of Persuasion:

Manufacturing Consent: The Political Economy of the Mass Media

I am confident there are hundreds of other equally worthy titles--this is merely a starting point for your own explorations. Please go to my complete list of recommended books and films for more ideas.

Permanent link: Gift Ideas: Books for 2010 and Beyond

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Matt N. ($4), for your many generous contributions, intellectual and financial, to this site. I am greatly honored by your support and readership.

A Must-See Film and Must-Read Book

noreply@blogger.com (Charles Hugh Smith) — Fri, 18 Dec 2009 15:19:00 +0000

The film Food, Inc. and the book The China Study illustrate two key parts of theSurvival+ analysis: simulacra and an integrated understanding of how food production, diet, health and sickcare a.k.a. healthcare are linked in a causal chain.

Though I seem fixated on the Survival+ analysis, the reason is simple: it provides a framework for understanding all the apparently unconnected (or seemingly independent) problem states which are dooming the entire structure of the status quo.

The new documentary Food, Inc. is a prime example. The film does an excellent job of describing how a simulacrum of real food and healthy farming has been presented by immensely powerful (and heavily protected by the State) cartels: agribusiness, national supermarket and packaged food conglomerates, fast food multinationals and the media/marketers who rake in billions hawking fake food as if it was actually real.

Slick marketing also creates an entirely false simulacrum of corporate farming practices: the adverts show a happy cow in a green field, while the reality is a feedlot of wretched animals crowded together, covered in manure, forcefed corn to fatten them up as quickly is possible.

The similarity between the wretched, unhealthy animals crowded into feedlots and the human consumers crowded into fast food outlets is not coincidental.Stuff a human being with 200 pounds of fatty meat, 200 pounds of refined sugar, 300 pounds of high fructose corn syrup and half a ton of heavily refined white flour, white rice and fried potatoes a year, and guess what, you get an animal in very poor health.

Cattle are selected to eat grass, not corn, and humans are selected to be omnivorous, eating a variety of seeds (legumes, nuts, etc.), fruits, meats, fish, vegetables,both raw and cooked. They are not selected to eat "food" which has no fiber and essentially no nutrients.

There are many maddening and disturbing scenes in the film: the family with a very overweight and diabetic father is filmed going out for "cheap" hamburgers because they work too late to have a home-cooked meal. Later, they're filmed in a standard supermarket, passing over the broccoli because it's "too expensive."

So the insulin which costs the family $260/month is "cheap" and real food is "costly"? This sort of insanity is the result of carefully manufactured fake food which appeals to our innate cravings for salt, sugar and fat, all of which are rare in agrarian or hunter-gatherer environments, and a carefully constructed simulacrum of food and food production.

The causal chain between the way food is grown and what is eaten is drawn with great clarity by the book The China Study: The Most Comprehensive Study of Nutrition Ever Conducted and the Startling Implications for Diet, Weight Loss and Long-term Health. Based on detailed research from hundreds of counties in China, the study confirms a common sense understanding of the causal chain, i.e. "what you eat is what you are," and "disease comes through the mouth" (the old Chinese proverb that poor diet causes illness.)

No surprise that a vegetable-based diet with plenty of variety and fiber is linked to long, healthy lives and a diet heavy with fatty meats and refined grains is linked to shorter lives burdened with chronic illnesses. There is no surprise here because humans were selected to consume a fiber-rich variety of foods, meat included. While meat and fat are the dominant sources of calories in small subsets of humanity (Inuit, etc.), a rugged lifestyle kept the Inuit much healthier than they are now, eating packaged food.

Diet and lifestyle are linked to good health? Once again, no surprise there: humans are selected to walk and run great distances. Stop moving, start eating a fake, fatty, sugary diet, and you get a nation of diabetics.

As I take pains to describe in Survival+, the fabrication of a simulacrum reality in the present requires that the past be suppressed or buried in a manufactured amnesia.

Thus the fact that adult-onset diabetes was rare a mere 40 years ago is rarely linked to the question: what has changed so dramatically in the American diet that chronic diseases are exploding? And if the answers are "obvious"--fast food, fake food, the marketing of "convenience" over nutrition, the larding of food with salt, sugar and fat, the dominance of TV over preparation of actual food, etc.--then why aren't the solutions equally obvious?

The answer is simple: basic, nutritious food prepared at home from scratch is simply not profitable.

This integrated understanding leads to a crystal-clear grasp of why a nation swept by epidemics of chronic "lifestyle" diseases has a sickcare system which will bankrupt the nation even as it does nothing to stem the epidemics: managing chronic diseases caused by unhealthy lifestyles and diets is immensely profitable. Promoting healthy lifestyles and diets is not profitable at all.

My "solution" is always the same: start by turning off the TV. That is the essential step one. If your mind has been poisoned by media/marketing propaganda, then your body will be poisoned by what you consume as a result of what you now think/believe/desire.

Rent the film, borrow the book, even if you know all this already. It will be instructive to see what others are discovering for the first time: we are paying the price of simulacrum passed off as "real," of eating fake unhealthy garbage passed off as "real food," and of mindlessly "consuming" a diet of corporate media/marketing fixated on profiting from our deepening insecurities, restless unhappiness and chronic diseases.

Permanent link: A Must-See Film and Must-Read Book

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

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

Survival+ Trends for 2010

noreply@blogger.com (Charles Hugh Smith) — Thu, 17 Dec 2009 13:35:00 +0000

Here are a few key trends which will gather momentum in 2010--trends drawn from the Survival+ analysis.

My purpose in writing Survival+ was to provide a coherent account (i.e. anintegrated understanding) of the powerful trends which are working beneath the superficial surface of our economy and culture.

Survival+ explains why the status quo is doomed, and illuminates the mechanisms which doom it. It also describes "the way out"--we must each put our energy into constructing a parallel, transparent, self-organized, re-localized system which is entirely legal and entirely independent of the failing, doomed status quo which is stripmining the productive to enrich the public and private Elites (file under "Fall of the Empire, Roman and other").

Here are a few of the trends described in Survival+ which I anticipate will be gathering momentum in 2010.

1. Millions of productive citizens will opt out, voluntarily or involuntarily.Millions of small business owners will get tired of paying taxes so thousands of Federal bureaucrats can "earn" $170,000 a year (and pile up benefits the private sector can only dream about) and make sure Goldman Sachs employees (the "doing God's work" CEO is only worth $250 million, poor guy) can divvy up $16 billion in ill-gotten gains.

While they aren't wealthy, many small business owners are comfortable because they scrimped and saved and sacrificed. So when they close their business because it's no longer worth the hassle, the guff, the taxes, the bureaucratic fees and paperwork, then they will survive. The closure of the business will deprive their employees of jobs and the local stripmining machinery (local government) of tax revenues--revenues which cannot be replaced.

Given the dominance of the financial sector, agribusiness, pharmaceuticals and a hundred other concentrations of capital and political power (cartels), then the individual citizen has literally no choice but to opt out.

Those who have worked like crazy to net $170,000 will no longer be willing to work that hard so they can pay absurdly high tax rates to support bureaucrats raking in $170,000 a year for going to pre-meetings (or whatever) and public-employee retirees double-dipping (drawing $100K+ pensions and bennies and getting rehired immediately on contract to do the same job they just left.)

No, thank you, we really don't need to work this hard to support you. We are tired of being serfs. The more you try to tax "the rich," the more "rich" people will opt out.

Many will be opted out involuntarily. Those who believed the fantasy that sacrificing their lives to make partner or get that corner office will suffer great disillusionment when they are axed without a qualm. They "won't be fooled again." Take your 60-hour a week career, Corporate America, and shove it where the sun doesn't shine.

Others will be opted out by the structural implosion of the industries they worked in for decades. Just today I saw a man about my age (mid-50s) gathering recycling on our street. I'd seen him sorting through the bins before, so I asked him if he was collecting glass or plastic. Since he was not using a cart, he said, "no glass, just plastic" so I went to get our neighbors' bins of recycling for him.

Whenever I see a guy or gal collecting recyclables, I think how little separates us.

In chatting with the gent, I learned that he'd been a carpenter for 25 years, never without work until last year. He was expecting an extension on his unemployment shortly which would enable him to move out of the homeless shelter. He still had his work truck, stored at a friend's house.

I don't know if construction will ever come back to the point that all the hundreds of thousands of people who made a living in the industry will be employed again. I think not; bubbles don't reinflate.

The same can be said of millions of people laid off from retail and a hundred other industries. The jobs aren't coming back, regardless of what propaganda is issued by Washington. (Note to Obama White House: start issuing indictments, not more worthless propaganda.)

2. Millions of households will get by on one salary where they once had two. As the status quo devolves, jobs are starting to disappear even from the so-called "invulnerable" industries like government and healthcare.

3. Internecine Conflict Between Protected Fiefdoms will intensify. As Federal and local government tax revenues continue plummeting, "tax the rich" schemes will proliferate and promptly backfire. The truly wealthy--the 1/10 of 1% who own some 2/3 of the productive assets of the nation--will buy exemptions or loopholes from their corrupt and venal Congressperson for a mere $100,000 or so. (Even a million is cheap when you're saving $100 million.)

That leaves the working "rich," those professionals and business owners who have a choice. They can always opt out and just shut down, move to another state or country or cut their business or hours down to subsistence level.

The more "raise taxes" schemes which are passed into law, the faster tax revenues will drop. Most lower income households pay no tax at all except the 7% FICA/Social Security tax. The "rich" pay almost all the income taxes, and as they opt out tax revenues have nowhere to go but down.

Stunned that their revenue-enhancement plans have backfired, the various protected fiefdoms (fire departments, cop shops, city hall, school districts, transit districts, universities, "Defense" a.k.a. Global Empire, brought to you by Military-Industrial Complex, Inc., with special guest, Blackwater Associates, Sickcare/Medicare/Medicaid, and so on) will start jockeying to be first in line for the dwindling tax swag.

Fire departments will start mailing out flyers pleading for extra property taxes lest they have to close a station or three (anything other than take a pay cut or slash their lavish pension/medical bennies) and Police chiefs will exit their chauffeured vehicles a block from the "town meeting" (so they can appear to walk in with appropriate humility) where they will plead for "more cops on the street." (Never mind the PD retirees drawing $100K per year in cash and bennies.)

The revolving door between "Defense" corporations and the Pentagon will spin even faster as lobbyists sprout like evil weeds, hawking new costly ways to "fight" GWOT (global war on terrorism). "Either pay us now or the nation will be at risk." Yeah, right. Like a $300 million fighter jet has anything to do with GWOT, or "Homeland Security" has anything to do with, well, homeland security.

Go ahead and nail another "terrorist leader" in the Yemeni wastelands with a high-tech drone missile; did anyone look at the demographics of the region, which is exploding with literally millions of young men devoid of goals and gainful employment? Are high-tech weaponry toys anything other than profit machines for Protected Fiefdoms? Go ask the captains and commanders on the ground before you answer; don't take the word of some overpaid pundit/PR hack/government factotum.

Sadly for the Protected Fiefdoms, there simply won't be enough money to fund all their fat jobs, fat pensions, fat benefits, fat expense accounts, fat contracts, etc. (The Chinese have simply stopped buying more U.S. Treasuries, by the way; the "pusher" is getting tired of providing endless credit to the junkie, who will soon be experiencing the dread tremors of agonizing withdrawal from credit dependency.)

That's when the Internecine Conflict begins in earnest. Dark mutterings will turn into angry rants; everything is sacrosanct and must be funded "at all costs": subway and bus service, education, cops, fire department, carbon credits (more on that new Wall Street scam next week), and of course, sickcare--and above it all, the high keening whine that "we were promised this forever and ever," "it's in the contract."

Check the streetwise reply: "You can't get blood from a turnip."

The snake can eat its tail for awhile, but at some point the transit agency will rebel at the cost of sickcare "insurance," and so on; each Protected Fiefdom will be sharpening their knives for other Protected Fiefdoms. Politicos, bought and paid for many times over, will find it impossible to reconcile all the demands placed on the fast-dwindling tax swag under their control.

Like tribes unused to cooperation, no fiefdom will consider negotiating a 25% cut in pay, benefits and pensions for all the fiefdoms; each will seek to eviscerate the budgets of other fiefdoms to protect their own share of the swag. All will fail and the entire government will slip into insolvency. Greed, avarice and blindess have consequences.

4. The legitimacy of the State and Financial/Corporate Elites has fallen below a fatal tipping point. People will not just max out their credit cards and then stop paying--they will do so with righteous pleasure, confident that they are simply dishing out precisely what the Financial Elites have earned by their own avarice, embezzlement, debauchery of credit, corruption and purchase of political power.

Citizens will move their business to the underground economy and sign up for for "free" government benefits at the same time, feeling that extracting swag from the government (controlled by financial and other Elites for their own benefit) which ignored their interests and offered simulacrum reform rather than real reform is simply a rough sort of justice.

This is the result of a legitimacy squandered in sycophancy and service to banks, Wall Street, agribusiness, and all the other Elites which rule the government like a puppetmaster controls a puppet.

Others will shift to the underground economy because they simply can't afford to pay taxes any longer; they need every dollar of income to simply survive. Paying taxes is no longer an option, whether they consider it legitimate or not.

When the demonstration of angry citizens fills Wall Street, the nervous bankers looking anxiously down and the authorities tasked with protecting the craven Elites will both declare it a "mob;" and perhaps State agents from the Ministry of Propaganda will toss stones through a few windows to solidify that spin in the corporate Mainstream Media.

5. Popular uprisings will be ignored, written off or downplayed, protest movements will be marginalized by the corporate media, and eventually the State's machinery of repression and subterfuge will crank up to full power. All the tricks of fascist repression deployed in the 1960s to stifle, undermine and repress free speech will be brought back in new, subtler guises: inept black bag jobs are out, there will be no fingerprints or taped doors left this time around.

Just to refresh your memory of how the Ministry of Propaganda is organized now:

Permanent link: Survival+ Trends for 2010

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

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

Overcoming Depression in a Depression

noreply@blogger.com (Charles Hugh Smith) — Wed, 16 Dec 2009 15:39:00 +0000

Financial worries and failures can sap our confidence and hope to the point that depression grabs us by the throat. But there is no shame in poverty or failure; happiness requires much less than is commonly supposed.

One of the key purposes of Survival+ is to re-examine what our culture implicitly lays down as the "baseline requirements" for prosperity and happiness.

Comparing ourselves to unattainable idealizations of "success" and "happiness" can cause a gnawing internal misery. As the New Depression takes its toll on the economy, livelihoods and household assets and income, many feel like failures as their jobs, social standing and wealth evaporate.

It is terribly easy to slip into that private Hell of self-recrimination and hopelessness; indeed, once the descent is irreversible then a cruel obsession with past decisions --now revealed as glaringly disastrous--can feel irresistable.

My longtime friend (from high school days) G.F.B. recently opined that fame/media exposure is the "new wealth": people crave it more than money. Private, hidden wealth is simply another form of poverty in our media-deranged society; it is better to be poor and get 15 minutes of fame on the tellie (TV) or Facebook than to be unknown, invisible and wealthy.

Perhaps all this is a function of the great gulf which only widens by the day between wealth and most of the citizenry; with wealth from speculation in housing now a distant memory, and no other means to get rich available, then this mad desire for media recognition seems an attainable substitute.

But let's suppose you get the mansion on the beach and national facetime on TV. The next day, you're still yourself, and your feelings about yourself remain unchanged. You still have the same patterns of thoughts and emotions, and you still have to live an ordinary life, even if you have a personal chef and personal assistant.

It is my observation that the more that is done for a person, the more trivial and petty their concerns become.

There is only one success in life, and that is being yourself. That's the only "career" no one else can pursue, and the only "success" no one else can attain.

It's certainly nice if being yourself leads to the chalet in Aspen, the beachside mansion and facetime on TV; but for most of us, being ourselves doesn't align with the skillsets and character required to become rich and famous. And those who substitute the acquisition of wealth and/or fame for being themselves eventually find themselves firmly bound in a bitter unhappiness sporadically relieved by various addictions and futile therapies.

For some reason beggars and panhandlers have latched onto me as an easy mark since I was a mere lad of 17. I have trained myself to ignore most of the pleas and scams, though I do toss a buck into the open case of street musicians. Since there are hundreds or even thousands of beggars and panhandlers in the urban area around me, even if you felt it a generosity to offer up some coins or a dollar or two, you would quickly use up all your cash within a few blocks.

While I was locking my bicycle downtown yesterday, a tallish male street-person nearby turned round to face me and said in a pleasant voice, "How would you like to sponsor my dinner?" His eyes were clear--he wasn't drunk or stoned--and his entire persona was confident and easy-going.

I replied that I liked his pitch, and he said that he'd panhandled through New Zealand for a number of years. He said "panhandled" not with irony or shame but as if it were as noble a profession or trade as any other. Marvelling at his use of the word "sponsor"-- how much more appealing than "spare change?"--I extracted a small bill from my wallet while we chatted. He noticed my bad eye (torn up by an errant nail 32 years ago) and commented that a friend's daughter had a similar disfigurement in her eye. He was entirely at ease and completely focused on our modest conversation.

Poverty and begging did not strike him as shameful or as a reason to hate his life or himself.

While I don't recommend this gent's lifestyle, I found his positive attitude, self-acceptance and honesty quite refreshing.

I finally saw the recent Japanese film Departures and saw a similar message in the movie (which I highly recommend).

In the film, a young man's musical career as a classical cellist abruptly ends. Knowing he doesn't have the talent to rise any higher in that rarified profession, he sells his very expensive cello and feels a great burden lift from his shoulders as he leaves the store.

Being a professional cellist simply wasn't him; it was a goal pushed on him by his father. While he enjoyed playing the cello, the career was not a match for his character.

I won't give away more of the plot other than to say that his new profession--delivered by Fate, it would seem--is far from performing classical music and distressing enough to drive away his young wife. But it was a profession that somehow suited him in a fundamental fashion.

Recently I received an email from a young attorney in New York City who wrote that my essay For Aspiring Writers: the Worst Advice You'll Ever Read posed a direct challenge to him: though he was working 12-hour days as a lawyer, he wanted to be a fiction writer, and my little essay had fired him up to "prove me wrong," i.e. he could write despite his career and busy days.

I wrote him a reply which basically said, excellent, go for it, but realise you have to like the entire process of writing, and your expectations have to be low enough thathaving a single reader is success.

Being a rich and famous author certainly sounds appealing, and I understand the young attorney's dream. But there is a great and rich irony here; many people who watch TV shows have the impression that a career practicing law is glamorous, exciting and rewarding both in terms of being heroic and well-paid.

They should intern in a real law firm for a few months before filling out that law school application.

We are all bombarded with mass-marketed propaganda about how great it is to be wealthy/well-compensated, to get that corner office with a view, to have 1,000 "friends" on Facebook or to actually be--gasp!--on TV. But the hype is false; it's all about selling you something as an illusion of happiness and fulfillment. It's all a mirage; when you finally reach it, you find not happiness, prosperity or fulfillment but a deep, eviscerating emptiness.

A famous author once recounted that the day after she received a prestigious literary award, she fell into a deep depression that took years to overcome. That's the price of believing happiness flows from recognition and money.

Yes, some money (or equivalent) is necessary to live. But we have to be careful not to draw a causal line between X amount of money, X quantity/quality of possessions or X minutes of time in the media spotlight and happiness, prosperity and fulfillment.

Among many great ironies is this one: a serving of brown rice (or cornbread/tortillas) and beans is a most delicious meal when you're truly hungry. It is very cheap, and easier on the planet and your health that a juicy, fat-marbled chunk of meat or a cream puff or other luxury food item.

Bonus pop music reference: "Savoy Truffle" lyrics Savoy Truffle (Youtube)

Yes, yes, oh yes, luxury, status, wealth and the worshipful gaze of the camera are all wonderful and fine, but they aren't happiness.

An insightful commentator (and reader of this blog) who goes by the screen name Publius recently posted a few lines from the poet Rainer Maria Rilke's Letters to a Young Poet, Letter One, on the excellent blog deep into artlife west:

If your daily life seems poor, do not blame it;
blame yourself that you are not poet enough to call forth its riches;
for the Creator, there is no poverty and no poor indifferent place.

Yes, I know this sounds awfully precious in a world where people are hungry and broke and their spirits are in tatters. But nonetheless it remains true, and as someone who was down to my literal last $100 in the past "Great Recession" of 1981-82, I don't find it untrue or flippant. It is in fact the tonic which eases the pain of self-recrimination and sense of failure.

Failure is as normal as breathing. To distain and fear failure is akin to saying you only like the intake of breath and not the exhalation.

We are what we do every day. The only thing no one can take away is your personal integrity. It is the ultimate treasure, a foundation that can support the greatest accomplishments. In times like these, accomplishments which may appear small from the outside are great indeed to those struggling through failure, poverty and uncertainty.

As I wrote in the last page of my novel For My Daughter: take strength, you are not alone.

Permanent link: Overcoming Depression in a Depression

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Paul L. ($125), for your overwhelminging generous contribution to this site. I am greatly honored by your support and readership.

Why a 35% Decline in Housing Values Would Be Good for the Nation

noreply@blogger.com (Charles Hugh Smith) — Tue, 15 Dec 2009 14:21:00 +0000

Housing eats up far too much of household incomes. The best way to lower the cost basis of housing is for prices to revert to 1995 or lower.

One of the key tenets of this blog and the Survival+ analysis of full-spectrum prosperity is that the cost basis of our entire economy must be lowered dramatically. The status quo "solution" is to borrow ever greater sums of money to pay the spiraling-out-of-control cost basis of one industry after another:

Healthcare (i.e. sickcare) costs rising? Borrow another trillion dollars to pay the bills.

Housing costs still too high? Borrow $1.2 trillion to buy toxic dead-zone mortgages so irresponsible lenders can pump out another couple trillion in soon-to-be-toxic mortgages.

Higher education costs going through the roof? Make students borrow hundreds of billions of dollars and enter a life of debt-serfdom to pay for their education.

Borrowing trillions to pay out-of-control price spirals will lead to national insolvency. There is no other end-state.

The solution is to lower the cost structure at the fundamental level. You want to encourage small businesses? Then let every commercial real estate owner in the nation go bankrupt and sell all the millions of square feet of commercial space for 10 cents on the dollar. The new owners' cost basis will be so low that they can rent out a space for $500/month that once required $5,000/month just to cover the bloated mortgage on the grossly overvalued property.

Let's look at some charts for cost-basis context in residential housing.

A 35% decline in housing from current levels is already baked into the reversion to pre-bubble valuations. The Fed is trying to hold back the tide with very expensive sand castles; now that the Federal government owns the insolvent Fannie Mae and Freddie Mac mortgage giants, it has shifted the speculative lending to FHA (Federal Housing Administration) which as a result is now in financial trouble and needs a bail-out to remain semi-solvent (surprise!).

This is the result of hyping home ownership as a speculative investment during bubbles: equity plummets as prices revert to historic averages. This is a rather staggering chart; as a percentage of GDP, homeowner equity has already dropped below the 1997 pre-bubble line. As far as actual equity is concerned (as opposed to nominal prices), the housing bubble's gains have already been completely erased.

It stands to common sense that negative equity drives foreclosures. At some point, the burdens of attempting to pay a mortgage which far exceeds the value of the property makes little financial sense. Given that 15+ million households have negative equity, we can see that the foreclosure/short-sale pipeline is stuffed for years to come.

California prices have already retraced about 3/4 of the bubble; another 35% (roughly $100,000) would complete the reversion to pre-bubble valuations.

It is important to note that the housing bubble had little to do with actual construction or material costs. The bubble was entirely debt/financial-based. As this classic chart shows, construction costs actually dropped from 1980s peaks.

As for demographics/population driving prices higher--if that's true, then why are there (according to the Census Bureau) 18 million vacant dwellings in the U.S.?

The cause of high rents is high mortgage costs which are caused by high valuations. Joe Blow buys a rental building in the bubble years and his mortgage is huge. So he has to raise rents in order to make his monthly nut. Is the high rent related to anything other than a speculative frenzy? No.

So if Mr. Blow's building goes into foreclosure and is auctioned off at 50% of what he paid, then the new owner can cover the (revalued) mortgage for considerably less money. Thus, resetting housing valuations for owners also resets housing costs for renters.

From at least one point of view, the entire "project" of persuading Americans that homeownership was the high road to accumulating wealth was a stupendous scam perpetrated by those industries which benefitted from the elevation of homeownership to quasi-religious status.

Yes, it creates stable communities, etc., but when households essentially enter debt servitude to support owning a house, driving up rents in the "bargain," is either the household or community served in the long run?

Frequent contributor Michael Goodfellow recently commented on this dynamic:

Housing is the single largest expense for most people. For years, government has discouraged supply in lots of places (like the S.F. Bay Area), encouraged larger, more expensive houses, and encouraged borrowing. Even now, they'd rather prop up prices to keep down the number of foreclosures, rather than let them drop to cut living expenses.
Our obsession with owning a house causes lots of people to stretch their finances. They end up cash poor, but sure they have this great investment in the walls.

Yes, there are many good reasons to own a piece of land with a house on it, but financial speculation isn't one of them. Yet that is the reason that has been touted, either directly or implicitly.

The government's doomed obsession with propping up high house prices has left one class of homeowners in the shadows: the 1/3 of homeowners who own their homes free and clear. Those without a mortgage resisted the temptation to extract all their equity; they have no mortgage. Price fluctuations don't mean much to them. The same can be said of those whose mortgage was based on pre-bubble valuations; yes, it was glorious to be worth a small fortune at the top but life goes on, etc., as the mortgage is still affordable and the owners still retain substantial equity even after prices have fallen.

For those who are underwater, short-selling (selling a house worth less than the mortgage and the bank accepts the loss) or in foreclosure, isn't a reversion to much lower values in their interests, too? Once they rebuild their finances and credit, in a few years they might be able to buy a house for a price which is actually affordable by historic standards (i.e. about 25% of net income goes to the mortgage).

As noted above, lower valuations help the nation's renters, too, lowering the cost basis of the property owners and making renting and buying more competitive--a boon to both markets.

The only real solution to unaffordable, high-cost structures is to dramatically lower the cost basis of the entire sector/industry/market. Housing prices dropping another 35% and removing the speculative mindset from housing would in the long run greatly benefit households and the nation.

Permanent link: Why a 35% Decline in Housing Values Would Be Good for the Nation

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Alberto R. ($20), for your ongoing generous contributions, financial and intellectual alike, to this site. I am greatly honored by your support and readership.

Speculative Demand and Hoarding Drive Real Prices Higher

noreply@blogger.com (Charles Hugh Smith) — Mon, 14 Dec 2009 15:00:00 +0000

The combination of cheap money/limitless liquidity and speculative demand are driving real prices higher even as "real world" demand and income both falter.

Whenever I announce a topic as "critically important" then readership plummets. I'm not sure if it's karma for sounding self-important or a jinx generated by readers' fear of IBB material ("important but boring"), but I'm going to risk the curse and declare today's topic of critical importance in understanding how real-world demand can fall yet prices can continue rising.

Why is this important? In classic economics, falling demand (assuming supply remains constant, or that it falls at a slower pace than demand) leads to falling prices as suppliers cut prices to move product, take market share from rivals and hopefully stimulate demand.

But if prices rise due to speculative demand and hoarding even as wages, home equity and income stagnate, then we enter the dreaded vise of stagflation: prices for finished goods rise even as income stagnates or declines.

Frequent contributor B.C. outlines the dynamic very succinctly:

Since '05-'07, gold and other commodities have increasingly become an "asset class" into which hedge funds, pensions, and individuals have shifted money, i.e. "monetizing" use goods as opposed to paper assets or real estate, in an attempt to hedge against central bank credit-money printing and perceptions of the risk of hyperinflation at some point.
But rarely does one read or hear discussed the "hoarding effect" resulting from money flowing to gold and other commodities, creating artificial demand which pushes up the price of use goods required by firms and households. CHS: emphasis added
Two important aspects of the hoarding effect (1) increasing cost of production with slack capacity, reducing profits and incentives for further investment in production, and the past-through costs to households, which squeeze spending; and (2) the continuing downward pressure on money velocity as a larger incremental share of increasing credit-money supply goes to hoarding or speculating in commodities, with less money circulating in the larger economy.
As commodities speculators pile on with leverage, capturing a larger share of future surplus gains to existing and future commodities production, producers and intermediaries are required to go further out into the future to hedge or lock in prices, requiring many to become de facto commodities speculators themselves.
However, at some point, the speculative demand causes constraints on the real economy at which point the speculative alpha disappears, and buyers become sellers en masse to lock in outsized gains or to liquidate derivatives positions to avoid physical delivery, which was never the speculators' intention.

This is a profound dynamic that has received essentially zero coverage.

This slices through the cul-de-sac blather about deflation-inflation like a samurai sword through an over-ripe watermelon. Cheap abundant money drives speculative demand, fear of future inflation drives speculative hoarding, both divert funds and money velocity from the real world, which reduces real demand even as real prices rise.

The mismatch between speculative commodity derivative positions and physical delivery eventually drives a self-rienforcing liquidation of positions and leverage alike, crashing both prices and financial markets as the unwinding kicks off stops and reduces many positions to zero.

Couple this decreasing money velocity in the real world with income withdrawn from circulation to pay down debt (deleveraging, paying down credit cards, etc.) and you get a double-whammy on both velocity and disposable income: money is diverted to reduce crushing debt loads and pay rising prices. Consumers are crunched in the vise and Main Street investors can only watch from the sidelines, as they have no access to the credit or leverage enjoyed by large speculators and commercial traders.

Thus the "average investor" has few ways to gain from the speculative ramp-up in commodity and end-use prices, but ample opportunity to lose big when the cycle implodes, bringing down credit and equity markets as in Fall 2008.

Frequent contributor Harun I. offered this description of how easy credit fuels speculative gains and eventually, the destruction of consumer purchasing power:

Every government that has fired up the "printing presses" to monetize debt have created a boon for speculators. Those with first access to counterfeited money go out and purchase real assets at no real cost. However, their purchasing drives the prices of those assets up. By the time the money reaches the ordinary citizen, their purchasing power has been destroyed and they are effectively priced out of the market.
As long as the printing presses are running full steam, those with first access to the money, banks, are going to purchase real assets with that money just as they did in Weimar, Argentina, Zimbabwe, etc., and prices will rise.
Perhaps what we should be re-examining is our assumptions and definitions of inflation and deflation, exploring whether they can occur simultaneously.

Thank you, B.C. and Harun, for your insights. Many have attempted to build a case for deflation or hyperinflation. But without understanding the speculative dynamics outlined above, the picture is incomplete.

With the above dynamics in hand, it is possible to foresee consumers facing deflation in their primary asset--their house--effectively reducing their net worth, and deflating prices of finished goods which are mostly detached from speculative demand (for instance iPod-like devices, which contain little but mass-produced electronics and software) even as commodities with huge impacts on the costs of non-discretionary goods and consumer purchasing power such as oil and grains rise in a speculative-demand/hoarding spiral.

Indeed, we have already seen how speculative demand/hoarding of oil has created a situation in which the world is swimming in oil as consumer demand has plummeted--every storage facility is filled to capacity--yet prices rose to $80/barrel, only recently dropping to $71/barrel.

Without speculative demand/hoarding, how low would oil fall? That is unknown, but many expect the final Global Depression collapse in oil prices to reach $20 or even $10/barrel. (This is what I have termed the final "head-fake" in which oil falls one last time before shrinking supply drives it to $300/barrel.)

This overall dynamic is how you get falling net worth, declining prices for discretionary goods and rising prices for essential/non-discretionary goods such as oil.

This complex mix of inflation/deflation and falling purchasing power/asset base has long been my position on the simplistic (and thus misleading) "deflation/inflation" debate. What is new to me is the speculative dynamic which fuels just such a volatile mix of declining purchasing power and rising real costs.

I am indebted to David Hackett Fischer's detailed explanation of how rising prices run in long cycles--The Great Wave: Price Revolutions and the Rhythm of History--and to contributor Cheryl A. for sending me his work.

These inexorable cycles of rising prices are a key part of the Survival+ analysis and forecast.

Permanent link: Speculative Demand and Hoarding Drive Real Prices Higher

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Eelco S. ($50), for your prodigiously generous donation to this site (from the Netherlands). I am greatly honored by your support and readership.

The Work of Orestes A. Brownson (1893)

noreply@blogger.com (Charles Hugh Smith) — Sat, 12 Dec 2009 20:38:00 +0000

Correspondent Eric H. shares some of the prescient analysis of Orestes A. Brownson, circa 1893.

The past is an endless well of insight into the present, and voices from the past have the unsettling ability to sound quaint and keenly contemporary at the same time.

Correspondent Eric H., who contributed a key cognitive trap to Survival+, has introduced me to the thinking of a fin de siecle polymath/philosopher, Orestes A. Brownson. Eric prepared an excerpt of Brownson's wide-ranging analysis--one which strikes me as being very similar to Survival+ in combining an economic, social and ethical analysis of our devolving "end of work" era of rising instability and inequality.

Here are a few paragraphs of the complete excerpt, which I have placed in Readers Journal:

From Literary, scientific, and political views of Orestes A. Brownson (1893)
The Credit System
The fact is, the mercantile system, introduced by England, or the credit system, that is, the system of making debt pass for capital, is itself failing, in consequence of its own expansion. The principle of the system, as we understand it, is to do business on credit and to rely on the profits of the business done to pay the interest on the borrowed capital and to discharge in time the loan itself. This would, perhaps, be well enough if the capital borrowed were real capital, for the volume of business would then not exceed the ability of the country to sustain and no general depression of business could occur. But it is credit, not capital, that is borrowed. The banks do not lend money, they simply lend their credit, and consequently depend on their debtors for the means to sustain their own credit or to redeem their bills; and these depend on the amount and profits of the business they do on their borrowed credit. If they fail the bank fails, or suspends, as it is politely called. The greater the facility of borrowing credit, the greater the extension of business.
The multiplication of banks of discount facilitates the borrowing of credit, tempts an undue proportion of the young men of the country into business, and those already engaged to extend their business operations, till business is expanded far beyond the wants of the community or the ability of the industry and productions of the soil to support; and a collapse and business depression, as well as widespread financial ruin, inevitably follow. No wisdom, foresight, or prudence, no business tact or capacity, can save a house that has borrowed or given credit from failing, for it will be carried down by the collapse of credit or the demand for payment of the debt hitherto used as capital; and the means to pay it will not be forthcoming when business has been overdone.
Financial Remedies
The various remedies suggested, whether by the president or by prominent merchants, traders, and bankers, are puerile, and not even palliatives. There is no remedy for a gangrenous limb or safety for the patient but in amputation, and not always even in that. The essence of the present system is in using debt as capital. Under it no debts are ever really paid; there is only a transfer of the debt, and all debts are mortgages on the future. A debt discharged in bank-notes becomes a debt against the bank; in greenbacks, it becomes a debt against the government, but in neither case is there any liquidation of the indebtedness.
If the government credit fail – and a revolution or gross mismanagement may cause it to fail – somebody must lose; if the bank fail – and fail it must if it overdoes its business, if its debtors fail, if it lock up its means in unavailable or worthless assets, if there is a considerable shrinkage in their market value, or it its officers are speculators, stock-gamblers, swindlers, or defaulters – its creditors necessarily lose.
The bank depends on its debtors for its ability to pay its own debts, and the government would bankrupt the whole people were it to attempt to liquidate at once its entire indebtedness. It is more than it is now able to do to meet its ordinary expenses and pay the interest on the public debt.

CHS note: doesn't this precisely describe the current financial meltdown?

Click here to read the full excerpt.

Permanent link: The Work of Orestes A. Brownson (1893)

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Bill L. ($5/month), for your extremely generous subscription to this site. I am greatly honored by your support and readership.

Federal "Stimulus" = Heroin

noreply@blogger.com (Charles Hugh Smith) — Fri, 11 Dec 2009 16:04:00 +0000

Here is an extended analogy of the U.S. economy as a badly injured delusional mountain climber.

Analogies and metaphors serve as tools which capture the essence of a situation or context. So bear with me as I spin what may seem a wild analogy: the U.S. economy as aging, delusional and now badly injured mountain climber.

Back in the day, U.S.E. (U.S. economy) was indeed a lean climbing machine; trimmed of fat by the arduous malaise years of the 70s (a.k.a. the Bear Market of 1967-1981) and restored to a modicum of reasonably honest self-critique by the near-collapse of governance caused by various official lies, obfuscations, secret black-bag jobs and embezzlements, U.S.E. tackled one peak after the other: inventing the personal computer revolution and the Internet, to name but two which revolutionized global commuication and commerce forever.

But then the hubris of endless success set in. U.S.E. started taking on riskier routes up heretofore unexplored peaks, while letting his safety equipment fray. The twin peaks of Financial Innovation and Teowaki (the native word for "Endless Immense Profits From Doing Nothing But Shuffling Paper") beckoned, and even as his fitness declined to flab, his self-confidence rose to delusional heights.

Not only would he conquer these peaks but he would do so with a pathetic collection of jury-rigged safety harnesses and badly frayed ropes.

U.S.E. slipped on his ascent in Fall 2007, a warning that his route up Financial Innovation was riskier than he was willing to acknowledge; but he ignored the warnings and actually switched to an even riskier route, one which experienced observers declared as impossible to continue for long.

U.S.E. ignored the signs and dismissed the critics as "doom and gloomers." Alas, in the Fall of 2008, U.S.E. fell as predicted, and all his faulty, frayed safety ropes broke. He fell hard on sharp, broken rubble.

Unfit and flabby from years of high living and immense profits, U.S.E. insisted he was was only bruised a bit and nothing was wrong. But he was purposefully self-deceptive to the point of delusion; bones had been fractured and internal organs ruptured by his fall to the rocks below.

Rather than admit to the failure of his risky plan and safety equipment, U.S.E. opened his first-aid kit and placed band-aids over the fractured bones and rubbed first-aid cream on the skin over his ruptured organs. Then he broke open his vial of last resort: heroin to suppress the terrible pain of his injuries.

The first dose had an immediate effect: a pleasant euphoria came over his entire broken body: all would be well. As a stumbled down the rough terrain, his clouded mind roiled with new plans for ascending the same old mountain tops of Financial Innovation and Teowaki, only with routes marginally less risky.

But U.S.E. was delusional; he was in no shape to climb a grassy slope, much less a major peak with nothing but impossible routes. As the horrendous pain of his potentially fatal injuries returned, he jabbed another needle into his battered arm and injected another dose of high-grade heroin into his veins: borrowed money and Federal stimulus.

Rather than deploying savings and capital derived from income--having squandered his reserves on high-risk gambles and high living, he had neither--U.S.E. kept injecting borrowed money (heroin) to stave off the pain. Delusional about his injuries, he stumbled forward as if his flab was still muscle and his planning still prudent rather than suicidal.

Unfortunately, U.S.E. turned ever more frequently to the balm of heroin; and now, of course, he was addicted to the drug. His self-deception was now pathological; he was no longer able to perceive the grim realities of his worsening situation. In his derangement, he still considered himself King of the World and Number One, hardy and robust, easily able to scale Financial Innovation and Endless Profits once again, just as soon as he reached Base Camp and repaired his laughably inadequate safety equipment.

This delusional, addicted climber is the U.S. economy and its Id, the U.S. government. The only question is whether the climber expires peacefully at base camp in the haze of borrowed money heroin, or whether he attempts another ascent of Financial Innovation and falls to a quick death. Given his internal injuries, addiction and self-reinforcing delusion, there are no other visible options. Recovery would be possible but only if U.S.E. tore away the hubris and delusion which has conquered his mind, suffered the tremendous agonies of Cold Turkey withdrawal from borrowed money, and rehabilitated his broken, unfit body slowly, over a great length of time.

There is no evidence that U.S.E. is willing to make the slightest effort to pursue even one of these three essentials, much less all three at once. Thus he is doomed, by his own delusions and choices, to expire.

Permanent link: Federal "Stimulus" = Heroin

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Gene M. ($25), for this latest extremely generous contribution--one of many-- to this site. I am greatly honored by your support and readership.

The World Is Too Complex (Guest essay by Subuddh Parekh)

noreply@blogger.com (Charles Hugh Smith) — Thu, 10 Dec 2009 17:10:00 +0000

Guest essayist Subuddh Parekh is the proprietor of the honjaku.com blog.

So Dubai has fallen, another one bites the dust. What to make of this latest fall? The same old story of greed and excess? Perhaps. But it is also worth considering the role of technology in these financial collapses. Simply put, our technological prowess has far outstripped the capacity of our institutions and social systems that form the framework of our financial and social life.

Consider the joint stock company that is at the heart of our economic arrangements. The original intention of a stock as ownership of an organization where you could go vote on its governance seems antiquated, almost laughable now, drowned out in the trillions of trades made electronically not just in the purchase and sale of the stock but in the purchase and sale of an infinite variety of agreements about the stock, all those derivatives.

Look at AIG or Dubai World. Yes AIG made bad bets, but the scale and volume of their bets were possible only because of the technology they had at their disposal. So too did Dubai World. Imagine if AIG was still selling its insurance, in whatever form, through paper contracts? Would they have been able to process the volumes of contracts that they did?

As the scale of what we can do increases so too does its impact and ripple effect and so too does the scale of the fallout when what we do falls apart. Firms take the leverage they do because they can. Leverage is often justified by risk analysis. Lots of very brilliant Phds crank out sophisticated technical risk models to assess exposure and risk. These allow great profits in the short run and great bonuses that go with that.

They do it because they can, the computing power allows it and the institutional system designed for a different skill set and behaviour pattern is easily usable in this way. It’s difficult to see where restraint will come from. Even if nine people declined the tenth would and then the others would have to follow would they not? These people are not necessarily people with any moral defects or such. Go to a quant hedge fund and you will most likely find very single minded mathematicians.

Controls, more laws, more regulations are like band aids on a dam that is bursting. They may patch up a few things but they will not address the main issue. The more complex a system is the more complex and incomprehensible the control system required and in any case it is impossible to design a perfectly controlled system.

The world is simply becoming too complex for most people to comprehend, even many who are operating the levers of power. We seem to be in a historical transition phase where our new abilities to do things has changed our behaviour but our social systems are based on older behaviour patterns creating a big disconnect.

These transition phases have appeared in history before. While technological prowess can grow very quickly, social systems take much longer to change. This often leaves people in intermediate spaces. They must adapt to new behaviour patterns while still living with the conditionings and expectations of older social systems.

As it is much of the world has been struggling, especially in the developing world, with living in an industrial society while being raised with the social systems of an agricultural one. Now there is a new requirement thrown on top of that, that of living in a technological information society.

The world of displaced people in intermediate spaces is growing and it will only get much worse. It is hard to see how the tide will be stemmed, there is no stopping it. Someone somewhere will grab the baton and run with it, and no laws, no policing is going to be enough. It is simply not possible to ask people to become less competent.

When there was a major displacement of people in Europe because of industrialization and the enclosing of the commons people then had an outlet. They could go to America or Australia. Today where will the displaced people of the world go? There is no free space left on the planet. Well, perhaps Antarctica will beckon. (http://us.imdb.com/title/tt1093824/)

So what are the 'solutions'? There aren’t any as yet. We just have to deal with this complexity in whatever way we can. Some will choose to tune out, others will see if they can find a way to grab a piece of the pie, yet others will just have to limp along as best they can, some will experiment with new living arrangements, new community styles. After all, we can’t stem the tidal wave of technological know how but we can appreciate how it affects us, how to use it to our advantage and find a niche for ourselves as best we can.

Permanent link: The World Is Too Complex (Guest essay by Subuddh Parekh)

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, David K. ($50), for your outrageously generous contribution to this site. I am greatly honored by your support and readership.

Fragility and Resilience

noreply@blogger.com (Charles Hugh Smith) — Wed, 09 Dec 2009 16:00:00 +0000

Non-resilient systems are prone to rapid devolution or collapse. The same can be said of structures, enterprises, governments, people, values and institutions.

Yesterday I focused on the tremendous financial fragility of many American households. Being unable to put your hands on even $2,000 in an emergency might well be a definition of household financial fragility.

I address structural fragility, vulnerability and resilience at length in Survival+because resilience is a key attribute of sustainability. We cannot speak of sustainability without considering resilience, for a fragile system is only sustainable in the short-term and at great cost.

Resilience and fragility are largely commonsense. A financial system with 1,000 independent banks is more resilient than one with six mega-banks which are "too big to fail" and hence guaranteed to fail. A family with three sources of income is more resilient than one with a single source, and a household in which all three incomes are earned at the same enterprise is less reslient than one with three incomes from three independent sources.

Six huge banks which are all interdependent via credit default swaps and other leveraged derivatives are almost infinitely more fragile than 1,000 smaller banks which are independent of each other.

Certain characteristics add or detract from a system's resiliency.

Transparency adds, obfuscation and lies detract, as they destroy trust and legitimacy.

Mutual benefit adds, benefitting only a tiny Elite detracts.

Extraction of wealth from the community and exploitation of its people detract, as institutions which do so are dependent on fragile systems of dominance and control.

Leverage and debt both dramatically increase systemic fragility. Savings and capital increase resiliency.

Inner strengths such as integrity, faith, and goals are resilient; inner weaknesses such as greed, self-absorption and lack of integrity are fragile.

Shared goals create resiliency, a welter of competing self-interests leads to fragility.

Taken together, these attributes help us understand why the status quo in the U.S. is so extremely fragile, from the household level to the highest levels of government.

Financial leverage, power and control have been concentrated into a few hands which have exploited the citizenry without limit. Were it not for their corrupted, venal and deeply stupid protectors in Congress, Treasury, the Fed and the Obama administration, Wall Street and the "too big to fail" banks would be torn down like the Bastille by an enraged public tired of being debt-serfs.

Just as over-leveraged banks are fundamentally insolvent, so too are over-leveraged households fundamentally insolvent.

A culture dependent on lies, obfuscation and propaganda is terribly fragile, as the truth eventually topples all seemingly invulnerable fortresses built on half-truths and outright lies. The same can be said of individuals who have constructed their lives on artifice, dishonesty, denial and self-absorption.

Systems dependent on extracting weath from the many to enrich the few (the plantation model of debt-serfdom, in our present economy) are vulnerable to sudden collapses of the status quo.

Systems which have lost their legitimacy and the trust of their participants are extremely fragile. I would count the entire U.S. financial sector and economy and much of its governanc as among those systems which are intrinsically vulnerable to rapid devolution.

As noted in Absolutely Nothing Has Been Fixed, nothing is being done to introduce truth or bolster legitimacy. Instead, the touting of phony statistics and bogus "reforms" only speed the erosion of what legitimacy remains.

Permanent link: Fragility and Resilience

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Order Survival+: Structuring Prosperity for Yourself and the Nation from your local bookseller or from amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Kerri P. ($10), for your very generous contribution to this site. I am greatly honored by your support and readership.

What Must Be Addressed: Rising Abject Poverty

noreply@blogger.com (Charles Hugh Smith) — Tue, 08 Dec 2009 15:43:00 +0000

While the mainstream media hypes bogus statistics and endless propaganda about the economic "recovery," and Wall Street pockets billions in bonuses, abject poverty is rising while the government dithers away trillions.

CLARIFICATION: Many readers wrote to ask about the specific dates mentioned in yesterday's post. I did not realise I'd cast such an aura of mystery; 12/18/09 is OEX--options expiration, and Bullish market players usually ensure markets rise through OEX.

January 1, 2010 has two significances: Wall Street players will have booked their mouthwatering bonuses for 2009, and thus will be ready to go short to profit from the coming decline in stocks. Also, there will be a lunar eclipse on Jan. 1, and in at least one astrological tradition (Vedic/jyotish), eclipses are not considered positive omens.

I define abject poverty as lacking shelter and sufficient food to stave off hunger. By this simple measure, abject poverty is rising in the U.S. even as Wall Street pockets billions in bonuses, the government squanders $2 billion a day in Afghanistan and trillions more on toxic mortgage securities and other bailouts of the Power Elites.

Yes, there are homeless shelters and food stamps, but the reality of how many are living on the knife-edge financially is not captured in the usual (manipulated and massaged) government statistics.

The reality is better captured by this item from BusinessWeek's December 16 issue:

Almost half (46%) of 2,148 consumers surveyed recently said they weren't confident they could come up with $2,000 within a month in a crisis--from savings, family, friends, credit cards or other sources.
Even among those earning $100,000 to $149,000 a year. almost 25% doubted they could raise it, according to the survey conducted by research firm TNS with academics from Harvard Business School and Dartmouth College.
"We wanted to know if people could fix a broken car or furnace," says Harvard finance professor Peter Tufano, who adds that most studies he has seen measure "how much cash people have... not how much they can access."
The survey results surprised him. "The ability to cope with emergencies is much less strong than we might have thought."

This survey offers a staggering set of implications. Let's grant that we have no idea if the survey was scientific, but we can assume that the academics from Harvard Business School and Dartmouth College would not besmirch their reputations with wildly inaccurate or fatally unrigorous data collection.

Let's follow the idea that 25% of households earning $100,000+ can't lay their hands on a meager $2,000. First off, only about 20% of households earn above $100K. Most households make do on a sum closer to the national median of $46,000.

What does it mean when households not only don't have $2,000 in cash (savings), but they also lack the ability to put their hands on $2,000 from family, friends, or even credit cards?

We can surmise:

1. Their social/family networks are either threadbare or populated by others without savings or credit;

2. Their creditworthiness is near-zero. Either they've maxed out the credit they once had, or their previous credit lines have been cut off in the general reduction of risk/credit, or they are in arrears/default and thus have zero credit.

It's also possible, and perhaps even probable (though we have no data to support this projection) that both are true: most of those in Americans' social networks are in dire straits/hanging by a financial thread and their access to credit either private or institutional is near-zero.

We might even extend our query deeper into social networking, and speculate that many Americans no longer possess a social network populated with people who they could ask for a loan. (A 1,000 "friends" on Facebook might not replace even one real friend.)

We might also speculate that many citizens are now wary of loaning their dwindling precious reserves of cash to anyone, even friends, who they rightly anticipate will be unable to pay back the loan if the economy continues devolving.

Perhaps the cultural ethics of the nation have been so eroded by the endless (and apparently richly rewarding) scams, fraud, embezzlement, cheating and lying that people no longer trust even their friends to act with fiscal responsibility--a suspicion fueled, perhaps, by the very fact that few were able to save even a paltry $2,000 for a rainy day.

Or it may just be that the majority of Americans are essentially one paycheck or unemployment check away from homelessness and hunger, and thus the social networks of most households are populated by others in the same general economic situation.

If so, we might ask: why have so many households failed to save even a modest sum? Let's grant that many households may well have already consumed their savings as job and pay cuts eroded household income. Medical emergencies alone apparently account for a significant percentage of financial ruination (foreclosures and bankruptcies).

But we would be remiss not to ask if some households have done better than others as the bogus prosperity evaporated, and if so, why. The answer is not difficult but it is terribly painful to those embedded in American culture's permanent adolescence: long-term shared sacrifice.

Those of you who reside in states with large immigrant populations probably know families who bought a home, and by combining three, four or even five incomes, paid off the mortgage in a few years. Was this possible if every household worker spent lavishly on consumer goods and the "luxury lifestyle" propagandized by TV? No. It was only possible if all the earners in the household rejected consumerist appeals to squander money and chose instead to sacrifice desires for the greater good, i.e. reducing the mortgage to zero and assemble a substantial savings (six figures in many cases).

Such thrift was commonplace in the post-Depression decades. People did not trust banks, hence my grandmother has six savings accounts, most with modest sums--she owned more savings accounts than dresses.

I remember my first credit card, whch I only applied for after years of accumulating savings. I already owned land before I ever "owned" a credit card. This was common in the so-called "hippie era," which generally distrusted debt and institutions like banks. Hippies paid with cash or barter--at least until they devolved into yuppies.

This is not to suggest every household was financially able to amass substantial savings, but it is an open question to American society: how much credit and cash which could have been saved, with relatively modest applications of sacrifice and restraint, was squandered on "luxury goods," toys and travel?

Yes, the zeitgeist (especially television) encouraged rampant consumption and saving has been disencentivised for years by super-low interest rates. But nonetheless we have to ask how many private trillions were squandered, as a sort of cultural match to the trillions in public taxpayer funds squandered to maintain the financial Elites in their positions of power and privilege.

The responsibility for our financial ineptitude and precariousness runs both wide and deep.

For a first-person view, I turn to correspondent Doug W.:

For 2-1/2+ years, I have been analyzing, discussing and discussing the Economic Maelstrom we are in and it's potential social, political and international relations effects, but yesterday and today I saw an actual effect of this relentless unforgiving Storm.
Because I shut down internet and cable to my house, I use the computer at a branch of the Monmouth County (N.J.) Library System. This is located in an affluent town a few miles south of Red Bank & Rumson (a very wealthy town).
Yesterday at about 4:30 PM, I parked my car near a late-90s Toyota Carmry loaded to the roof with bags, clothes, suitcases and boxes. There was a woman in her fifties --I think--sitting in the car; I thought she was getting ready to leave. I went in to use the computer. When I left at 6:15 PM she was still there. I realized she was homeless. As I drove home, I remembered all the stories I've read in newspapers, on FinancialArmageddon.com, and elsewhere over the last two years about formerly middle-class people losing their jobs and then their homes and living in their cars; I realized how close I have come to that fate.
People who have never known homelessness or financial fear are now shell-shocked by forces they don't understand.
At about 1 AM I woke up (I haven't slept well for more than a year). It was raining very hard and it was cold out and I wondered about the woman at the library; and the countless millions of families and individuals on the edge of financial-economic oblivion around our once wealthy country worrying about what tomorrow will bring.
I realized how lucky I am --even though I must sell (or lose) my home of 24 years-- to have some investments and a home with NO DEBT in South Carolina to which I can retreat.
I just arrived here at the library a few minutes ago...the lady is still sitting in her car in the same parking spot.

Thank you, Doug. As someone who was down to his last $100 in cash during the last Great Recession (1981-82), I know the gnawing anxiety of being broke. (Yet I remain a debt-serf, too, still owing a mortgage.) Maybe such proximity to ruin is what sparked a fiscally conservative mindset in many of us. If so, the unlucky people are those who believed in the fantasy of endless asset-bubbling wealth and prosperity.

Correspondent Michael N. checked in with this account of how many households are balanced on a financial razor's edge:

I'm a part-time mortgage broker (in one form or another for about 24 years) and so I know the typical financial position of people. I can report that NONE of my originated loans have ever gone into foreclosure, but I must add that the majority of the people that I work with live paycheck-to-paycheck. This is for AAA, 6-digit income professionals. This is primarily why I have concluded "no way out" - either for the govt or society. We're in a debt trap.

Thank you, Michael. I am afraid I must concur with your conclusion.

Here is the first step to fiscal solvency and a saner worldview: turn off the TV except when watching quality films and documentaries via DVD. Take a walk outside in Nature; it will change your perspective for the better. (Thank you, Ken R. for this link).

Research how others are living well on absurdly modest sums of money; for instance,CONFESSIONS OF A BOTTOM FEEDER . (Thank you, Phillip H. for the link.)

We as a society have to deal with the rise in abject poverty on the local (decentralized) level. Hunger can be alleviated by the food stamps program, which helps feed over 30 million citizens for $30 billion a year--absurdly cheap when you consider we are blowing $2 billion a week in Afghanistan (gasoline and jet fuel are supposedly about $30 a gallon, delivered to forward bases). $30 billion is a mere 1% of the Federal budget. As Winston Churchill noted, putting milk in babies' bellies is a wise investment in the future--especially when it costs a mere fraction of the $8 trillion lavished on the banking sector Elites.

I have written about this many times recently:

Social Welfare, Socialism and Healthcare (May 19, 2009)

Unemployment: The Gathering Storm (September 26, 2009)

The Return of Big Government and the (de facto) Welfare State (March 17, 2009)

We as a nation must grapple with the difficult issue of providing shelter to millions of citizens. That will very likely involve setting aside secure (seasonal) campgrounds for tent cities and free RV parks, as well as some local control of housing units which have slipped between the cracks of bank/speculator ownership. As in: last previous known owner has 60 days to pay the taxes and bring the property up to livability codes or they forfeit the property to the municipality.

The days when some distant bank/fund owning 1/2,500th of a mortgage securitization can supposedly "own" a real house in a real neighborhood and do nothing but let it rot should end; either the "owner" (whoever that is, when the underlying mortgage has been tranched and sold and the mortgage holders purposefully avoid foreclosing just to avoid taking unambiguous ownership) maintains the property or they forfeit it to the community. Ownership entails responsibility: No responsibility accepted, ownership revoked.

There is no simple solution to rising poverty; the answer is not centralized or top-down. Radical self-reliance works on both a personal and community level.

Permanent link: What Must Be Addressed: Rising Abject Poverty

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Robert B. ($50), for your stupendously generous contribution to this site via U.S. mail. I am greatly honored by your support and readership.

Absolutely Nothing Has Been Fixed

noreply@blogger.com (Charles Hugh Smith) — Mon, 07 Dec 2009 16:07:00 +0000

Let's start with The Obvious: None of the fundamental causes of the global financial meltdown have been fixed in 2009.

As we careen toward 2010, it's a good time to return to basics, starting with this question: have any of the causes of the global financial meltdown been fixed? No.

Rather than address the actual causes, which would have required various financial Elites to absorb staggering, crushing losses, and a re-ordering of political swag, The Powers That Be opted to mask the systemic rot with massive, unprecedented giveaways of public taxpayer funds to various banking cartels and other financial Elites.

The political and financial Elites augmented this stupendous transfer of public monies to private hands with simulacrum "reforms" which do nothing to inhibit systemic looting, fraud, debauchery of credit and pillaging of the public coffers.

Lastly, these same Powers That Be orchestrated (with the collusion of the handful of corporations which own/control the vast majority of the world media) a vast, pervasive propaganda campaign to persuade the distracted, worried populace that the great ship of the global economy (2/3 of it owned by the top 1%) had been righted by government easing of money and credit and other interventions.

Bogus government statistics form the rotten core of this propaganda campaign. Thus the GDP supposedly rises even as the only accurate measures of economic activity--sales and income tax receipts--continue declining. While the government touts a drop of "only" 11,000 in November payrolls, private calculations arrive at a much different conclusion: 255,000 jobs were lost.

Given that almost 300,000 people supposedly "left the labor force" (meaning they ran out of unemployment and thus dropped off the count) and the Bureau of Labor Statistics ginned up tens of thousands of phantom jobs via their laughable "birth-death model," then we might conclude that 255,000 jobs lost is a dramatic undercount of the actual reality.

The processes of substituting propaganda for accurate data and simulacrum reforms for real changes in the power structure are core parts of the Survival+critique.

Beneath the propaganda swirling around "healthcare reform" a.k.a. sickcare getting sicker, lies the ugly, purposefully ignored truth: the thousands of pages of this "package" are larded and laced with giveaways to influential cartels which profit from the expansion of the sickcare system (public and private).

For example, California Representative Eshoo slipped in a multi-billion dollar giveaway to a handful (i.e. a cartel) of California-based biotechs: Eshoo bill huge boon for Silicon Valley biotech:

Buried in the giant health care bills in Congress is a multibillion-dollar bonanza for Silicon Valley's biotechnology and venture capital industries, sponsored by Rep. Anna Eshoo, a Palo Alto Democrat.
The provision would grant "biologic" drugs, a new class of drugs based on gene splicing and grown in living cells, 12 years of protection from competition by the generic drug industry, in addition to their patents.
A scathing report by the Federal Trade Commission in June said no added protection, much less 12 years, was warranted, and warned that the Eshoo legislation would ensure sky-high drug prices and stifle innovation on the most promising frontier of medical research.

Does anyone think this is the only "gift" to politically powerful interests in the thousands pages of legislation? The truth is this bill has virtually nothing to do with improving the health of the citizenry and everything to do with arranging the transfer of hundreds of billions of dollars in additional "healthcare" spending to a few cartels and Elites which dominate the sickcare "industries."

Virtually nothing in the hundreds of pages of legislation limits the systemic costs built into the sickcare system, and hence it fixes nothing.

Healthcare expenses, currently 16% of GDP, are rising at about 6-7% a year, regardless of which corrupt party is in power. The underlying economy is actually shrinking, regardless of the GDP propaganda being touted, but let's be generous and assume the crippled U.S. economy can actually "grow" 1% a year (and that's by borrowing and blowing trillions of dollars, of course).

If you project these trends, in 15 years the U.S. economy grows by $1.5 trillion but healthcare costs more than double from $2 trillion to over $4.2 trillion--roughly 30% of the entire GDP. And these are "best-case scenario" trends. If the economy devolves as I expect, GDP will be declining in real terms even as healthcare continues its inexorable expansion.

Does anyone think a nation which is adding trillions of dollars in new debt to its books and hundreds of billions to future interest payments, a nation which is pursuing an immensely costly strategy of global empire, a nation with $60 to $80 trillion (yes, trillion) in unfunded entitlement liabilities going forward, can possibly devote 30% of its total GDP to a healthcare system which has utterly failed to improve the overall health of the citizenry taken as a whole?

By all means, grab the public spotlight to scream and yell about the public option, or this or that issue; all that sound and fury is meaningless because the entire sickcare system, including Medicare and Medicaid, is doomed to insolvency within a few short years. If we don't accept an integrated understanding of health, much less healthcare, and the profound, systemic dysfunction of the current Kafkaesque system, then claiming that an expansion of the currently bankrupt system will improve health is truly insane.

As insane as claiming the U.S. banking system is now "fixed" because trillions of dollars have been squandered propping up the fraud and hiding off-balance sheet liabilities.

As insane as the government guaranteeing/owning 99% of the U.S. mortgage industry and buying $1 trillion toxic mortgage assets and then claiming the housing market, which is completely dependent on the government propping up irresponsible lending at absurdly low rates of interest, is "healed."

Absolutely nothing has been fixed in the past year. Band-aids have been positioned over fatal wounds, and the patient has been declared "healed." The wars of Empire are being expanded, a corrupt-to-the-core banking cartel thrives anew on government bailouts and interventions, a bankrupt, failed sickcare system is being expanded--these are not fixes, these are charades to maintain the current power structures and players being presented as simulacrum "solutions."

Just as a guess, the charade will start shredding at the seams after December 18, 2009, and gather speed after January 1, 2010.

You cover up the rot rather than fix the causes, then guess what: the rot only burrows deeper.

Permanent link: Nothing Has Been Fixed

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, D.S.M. ($20), for your extremely generous contribution to this site via U.S. mail. I am greatly honored by your support and readership.

The One Report on ClimateGate You Should Read

noreply@blogger.com (Charles Hugh Smith) — Sat, 05 Dec 2009 18:46:00 +0000

Is ClimateGate a tempest in a teapot or something more serious? Correspondent Michael Goodfellow sorts it out for us.

If you're like me, you haven't been able to make much sense of ClimateGate:is it just insider political backstabbing? What are the scientific implications, if any?Fortunately for us, frequent contributor Michael Goodfellow has read through the source documents and compiled a comprehensive, very accessible report.

Longtime readers already appreciate the clarity of Michael's writing and thinking. He has addressed the evidence for global warming in two previous essays:

Global Warming: Our Story So far
NASA and the Warmest Year

Here is his report:

Reading the "ClimateGate" Emails

On November 19, 2009, a 61 megabyte file called "FOI2009.zip" started to circulate on the Internet. This contained a directory of over 1000 emails sent to and from people at the Climate Research Unit, University of East Anglia, UK, plus supporting documents and software. Check a BitTorrent site for "FOI2009.zip" if you want a copy, or you can find a searchable index of the email at www.climate-gate.org.
CRU is one of the major climate research centers, and the people sending the messages are the biggest names in climate science. The revealed messages have been fairly embarrassing to the people involved. Phil Jones, the director of the CRU, has temporarily stepped down while it's being investigated.
Right-wing global warming "deniers" are having a field day with it. Mainstream press and the lefty blogs are taking a "move along, nothing to see here" attitude. Many commenters don't seem to have read the emails themselves. They are just repeating the same fragments over and over in the usual echo chamber.
I've been interested in climate issues for awhile now, and have written a couple of long pieces on where I think things stand. If you had to describe my position in a single sentence, it would be "the current data, models and theories of climate aren't solid enough to say one way or the other if humans are warming the planet."

Click here to read the rest of the report.

Thank you, Michael, for sharing your analysis. Oftwominds.com reprinted Michael's two essays, as well as another excellent climate-data analysis by correspondent Protagoras:

The Hockey Stick Breaks (June 25, 2007)

Permanent link: The One Report on ClimateGate You Should Read

BOOK NOTE: I have another box of Survival+: Structuring Prosperity for Yourself and the Nation on order and will ship signed books to readers who donated $40 or more or who ordered a signed copy as soon as I receive the box. Thank you once again for your patience.

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, David C. ($25), for your second generous contribution to this site, and for your excellent topic suggestions. I am greatly honored by your support and readership.

Bearish Cross in NYSE Volume Suggests Rally Will Crumble

noreply@blogger.com (Charles Hugh Smith) — Fri, 04 Dec 2009 16:10:00 +0000

A chart plotting simple moving averages in the New York stock exchange (NYSE) volume reveals a fundamental weakness in the current stock market rally.

If "volume is the weapon of the Bull," then this Bull Market Rally is either flat-out doomed or extremely fragile. Frequent contributor Harun I. graciously shared a deeply insightful chart--a chart of deceptive simplicity. It plots only two lines, as Harun explains:

The attached chart of 52-week (blue line) NYSE Total Volume and 200-week SMA (magenta line) is a reality at odds with mainstream propaganda.

Before I post the chart, please read the HUGE GIANT BIG FAT DISCLAIMER below to refresh your awareness that this is not investment advice but merely the freely offered musings of an amateur.

Here's a snapshot of the chart:

Click the snapshot to open the full chart in a new browser window.

If you examine the entire chart, you will notice how perfectly the lines track the great Bull market and the underlying economy; the moving averages only intersected during the 1990-91 recession/Bull market pause.

Now, however, the moving averages of volume are dropping and diverging as the 52-week moving average is plummeting below the 200-week for the first and only time in 26 years.

Simply put: volume is not supporting this rally, and if "volume is the weapon of the Bull" then the Bulls have no weapons at all--unless you count propaganda about "green shoots" and blatant government manipulation of the credit and stock markets as "weapons" which can compensate for declining volume.

But that's just another way of saying propaganda and manipulation can overwhelm reality. They have done so for 9 months, but reality has a nasty habit of wresting free of manipulation, lies and artifice at the most inopportune moments--like right now, for instance.

NOTE: Thank you to everyone who wrote me and/or contributed to the site in the past 14 days; I have several hundred emails to respond to and unglamorous tasks like collecting dead leaves and website maintenance which compete for my limited time. Your patience is much-appreciated.

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

Permanent link: Bearish Cross in NYSE Volume Suggests Rally Will Crumble

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Paul C. ($20), for your exceedingly generous contribution to this site. I am greatly honored by your support and readership.

A Megaphone Announcing Extremes of Sentiment and Indecision

noreply@blogger.com (Charles Hugh Smith) — Thu, 03 Dec 2009 16:25:00 +0000

A huge "megaphone" pattern in the "fear index" (VIX) presages a major break up or down as extremes in sentiment and indecision will soon resolve one way or the other.

I've missed the past dozen or so news cycles and have only looked at a few charts in the past two weeks. This one of the VIX really popped out: a big fat megaphone. Before I post the chart, please read the HUGE GIANT BIG FAT DISCLAIMER below to refresh your awareness that this is not investment advice but merely the freely offered musings of an amateur.

OK, here's the chart:

Megaphone patterns can be interpreted various ways, but what is obvious is the lower lows and higher highs--rising extremes in both directions which suggest a rapidly escalating tug of war between bulls and bears.

Now the VIX is not a stock or an index of stocks (or an ETF)--it is a measure of volatility based on the options being traded, presumably for "protection" against a major decline.

So what's visible here are rising extremes--new lows in the VIX suggest complacency and confidence, while higher highs suggest increasing fear and "itchy trigger fingers" of traders seeking protection at the first hint of decline.

Both can't be right. This chart suggests a great indecision plagues the minds and emotions of traders and speculators. Either the market is stable and rising confidently, and the VIX will settle lower without experiencing these wild spikes of high volatility, or the market will start falling and the VIX will rise without plummeting a few days later to new lows.

One way or the other, this megaphone will be resolved, and the same can be said of the stock market which the VIX reflects: the megaphone will break up or down, and so will the stock market.

As the dollar (DXY) plumbs recent lows and the entire world seems to be betting on further declines in the DXY, we might ponder the facts that 1) no trend lasts forever and 2) the seesaw between the dollar falling and the market rising suggests a rise in the dollar--when and if it comes--will be catastrophic for the 9-month old stock market rally.

The VIX is shouting "caution!" through a megaphone, at least to those willing to listen.

NOTE: Thank you to everyone who wrote me and/or contributed to the site in the past 14 days; I will be unable to return to my normal routine for one more day. Your patience is much-appreciated.

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

Permanent link: A Megaphone Announcing Extremes of Sentiment and Indecision

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, David H. ($15), for your most generous contribution to this site. I am greatly honored by your support and readership.

The Present Cannot Be Understood in the Present

noreply@blogger.com (Charles Hugh Smith) — Tue, 01 Dec 2009 19:24:00 +0000

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

Experience requires interpretation to reach understanding.

As the end of 2009 lies just ahead, it's a good time to state that the goal of this blog is to seek an interpretation of the present which provides anintegrated understanding of what we experience in "real time."

It may seem painfully obvious to say "the present cannot be understood in the present," or perhaps even counter-intuitive, but it nonetheless a profound truth.

Can the person who has just fallen in love understand all that is at work beneath his/her obsessive thoughts, mad hungers and overwhelming passions? Of course not; an integrated understanding of all that is launched by the immense complexity we tidily label "falling in love" takes years or even decades of parsing.

We are daily offered up data which has been neatly packaged and pre-digested for our consumption, with a specific intent: to convince us that the Elite-dominated status quo is in fine working order and it is working in our best interests.

We might start an integrated understanding by correctly identifying pre-digested interpretations of highly refined/massaged data "propaganda."

Thus we are reassured that a Black Friday tally of $10.7 billion is higher than last year's $10.5 B total, and thus the "green shoots" "recovery" is alive and well.

The context of just how meaningful $10 billion is in an economy of $13 trillion is left safely unstated.

Beneath the surface of direct experience and the present, various mechanisms are at work. An integrated understanding must peel away the obfuscations, ambiguities, lies, misinformation and propaganda and then properly place the present in historical and analytic contexts which elucidate the present in a longer-term and more insightful setting.

Though history may appear chaotic and random on the surface, we can discern three broad categories of mechanisms:

1. Sub rosa plans, agendas and actions which are purposefully obscured from the public. While some such agendas might be considered conspiracies, most are State/Elite policies aimed at maintaining and enlarging the powers and wealth of the status quo State and financial-rentier Power Elites.

Thus the "bail-out" of the financial sector with taxpayer funds and the entire "green shoots" stock market rally were far from random events. They track a carefully plotted plan of maintaining the status quo's power and the intellectual framework which supports it.

2. Unplanned contingencies such as the Afghan War which draw a response from an ill-prepared and divided Status Quo. As an example, we might ask: is the U.S. occupation/"mission" in Afghanistan bolstering or hindering the production of poppies and heroin there? I mean this is the broad sense, not in the narrow confines of a propaganda campaign which seeks to confuse the American public with happy stories of U.S. aid to Afghan farmers.

What are the consequences of the answer? Does anyone even know?

Exactly how does the U.S. plan to eradicate a shadow network in a vast, inhospitable country? Does such a plan (if there is indeed a plan at all other than saving face and "soldiering on") have any historical precedent of success?

Referring to the metaphor of the blind men touching various parts of an elephant and then describing the animal, we might ask what parts of the elephant the various U.S. Federal agencies are touching, and then compare their descriptions of the beast with the actual living animal.

Some three decades after the end of the Vietnam conflict in 1975, various interpretations of U.S. actions, policies and goals are still being issued and hotly debated: we could have won, we should have won (and exactly what was "winning" anyway? Sustaining the corrupt Thieu regime in perpetuity?), the war was a colossal mistake, etc.

What we know for a start is that any interpretation which ignores thousands of years of Vietnamese history, the social, political and religious threads of Vietnamese culture and the sub rosa interventions of the U.S. in Vietnam throughout the 1950s and early 60s will be fatally flawed and thus inaccurate.

The interpretations of the U.S. experience in Vietnam continue to echo and play out in the present, and thus these interpretations are far from mere historical analysis; they remain highly reflective of the present and the entire U.S. government's machinery of Empire.

3. Cyclical trends and forces which are not within the control of governments or private capital Elites. Examples include drought, global financial crises (government control of private debt repudiation is largely an illusion, as we shall soon see in 2010-2012), and various cultural/religious movements.

Though the State/Power Elites can propagate blissful accounts of endless reserves of oil, natural gas, shale oil and coal (we have 50, 100 or even 200 years of supply left beneath our own soil, if MSM accounts are to be swallowed whole), they cannot control the actual production or the cost/price of the energy in the long run. (Yes, various price control schemes can be tried but these inevitably lead to shortages and other disruptions.)

The complexities of all these contexts and mechanisms is overwhelming. Yet we cannot surrender to these fortresses of complexity without surrendering all hope of understanding the present and the future which is already constrained by forces far beyond the control of the government/Power Elites' partnership of domination.

It is tempting to slip into the comforts of ideological, simplistic "understandings" and other manufactured "truths" designed for easy consumption. But those understandings are inherently limited and thus misleading. They will not be accurate guides to the future, as they lack insight and are not based on an integrated understanding.

I hope you come along for the ride through 2010 and beyond. It promises to be an eventful voyage.

NOTE: Thank you to everyone who wrote me and/or contributed to the site in the past 12 days; I will be unable to return to my normal routine for a few more days. Your patience is much-appreciated.

Permanent link: The Present Cannot Be Understood in the Present

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Jim L. ($100), for your stupendously generous contribution of cash (and topic ideas) to this site. I am greatly honored by your support and readership.

The Grand Failure of Government to Limit Concentration of Power

noreply@blogger.com (Charles Hugh Smith) — Mon, 30 Nov 2009 19:43:00 +0000

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

From Dubai to the U.S. healthcare "reform" debate, a key context is the State's Grand Failure to limit the concentrations of power which then twist all State policies to meet the demands of self-serving Elites.

While much is made of the "balance of powers" in the U.S. and other democracies--the power of the executive branch being offset by the legislative and judicial branches--this "balance" completely failed to hinder the credit/housing bubble and the structural fraud and embezzlement at its heart. No branch of the "balanced powers of the State" saw any reason to interfere with the systemic looting and debauchery of credit and currency.

We should also note that in previous periods of extreme concentrations of wealth and high inequality, the "balanced powers" of the U.S. government did not reverse or even seriously challenge these long periods of high inequality. In this sense we should be careful not to overestimate the State's control over wealth concentration and rising inequality.

Despite the supposedly "leveling influence" of income taxes, wealth has become ever more concentrated in the past 40 years, paralleling the high inequality between the Civil War and the Great Depression. Neither the "trust-busting" actions of the Federal government in the early 1900s nor the rise of industrial unions reversed or disrupted the 1860-1930 period of high wealth concentration/high inequality.

This, then, is the grand failure of government: due to the concentrations of power accumulated by those with asymmetric stakes in the game, any attempt to limit a concentration of power is thwarted by status quo. All the issues which so worried Madison in The Federalist Papers have come to full flower: the power of the State has been legally channeled into Elites which have nothing to fear from any branch of the State because they are the State.

Despite decades of attempted electoral "reform," elections in the U.S. grow ever more prohibitively expensive, and it is still legal to contribute large sums of money to politicians. The cliche has it that "money is the mothers' milk of politics" and as has been noted above, it is far cheaper to buy a legislative loophole than it is to pay taxes, build treatment plants, relinquish monopoly, etc.

These concentrations of financial and thus political power flow ontologically from the concentrations of capital and labor that were necessary to industrial production.

The model of a "factory" mass-producing goods, so successful in manufacture, has been applied, consciously or unconsciously, to fields of endeavor which are structurally quite different from manufacture--education, for instance, with the mixed results one would expect of misapplied models.

The human mind's power comes from understanding models and applying them to new situations. In the long view, it is understandable that just as Newtonian physics sparked a frenzy of misapplied models (the human being understood as a mechanical device like a clock, etc.), so too would the highly successful model of concentrated mass-production be earnestly and enthusiastically misapplied.

This concentration of materials, machinery, transport, labor and capital--the factory and the industrial corporation--naturally led to a concentration of organized labor, a model which, now that industrial production has faded, has been misapplied to the last outsized concentration of labor: government.

With no real restraints on government largesse, then public-union labor has concentrated its political power and "won" (I use quotation marks because there has never been any real negative feedback to its concentration of power) stupendous benefits and wages which have created the "upper-caste" I have described above: a protected class of technocrats/apparatchiks who are compensated at two or three times (when pension and healthcare benefits are included) the market rates earned by their lower-caste private-sector brethren.

Once financial and political power has become concentrated into monopoly-capital cartels and State fiefdoms, then those Elites hold highly asymmetric stakes in the game: they have so much more to gain and lose from the political distribution of taxes and exemptions from regulation than non-Elites that they will fiercely deploy all their power and wealth to preserve and extend their share of the national income.

In contrast, the non-Elite citizenry have vanishingly modest stakes in the regulatory and tax-distribution games; while a narrowly focused tax law will enrich an Elite for decades to come, the consequences to the broad non-Elite citizenry are so diffused as to be akin to the brush of a feather.

Immense State/Elite empires have been constructed from initially modest taxes collected from tens of millions of non-Elites--Medicare, for example--while seemingly minor tax laws have enabled vast empires of private capital to solidify. For example, energy, where fortunes have been built on depletion allowances and other tax schemes far more favorable than those awarded to manufacturers, and real estate, where depreciation hides vast rivers of income behind the perverse idea that a building rising in real value is magically declining in worth.

From its humble tax-funded beginnings, Medicare has grown into a stupendously profitable empire which will soon exceed both the military-intelligence complex (the Pentagon) and the Social Security system in budget. This vast empire is comprised of loosely allied fiefdoms (the A.M.A.,trial lawyers, pharmaceutical, insurance and hospital industries, etc.), each eager to defend its turf from non-Elite interference and the encroachment of the other fiefdoms.

The State's technocrats/apparatchiks have gained income and power along with their private-sector partners, and thus rather than provide a negative feedback counterforce to this concentration of wealth and income, the State is in effect a positive feedback, furthering the concentration of wealth and power into Elite hands.

State Monopolies: Violence, Conscription, Taxation and Inflation

The State itself of course holds monopolies on a handful of powers that are concentrated indeed: the dispensation of "legitimate" violence, the power to conscript citizens to fight wars (legally declared or otherwise), the power to tax the citizenry and lastly, the terrible power to rob the citizenry by means of inflation and/or currency devaluation, what I term theft by other means.

Economist John Maynard Keynes quipped, "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." This is theft by other means.

Why does the State seek to steal its citizens' wealth via inflation? The politics of inflation dictate it:

1. Politicians need to distribute swag ("free money") to the electorate every two years. Their perspective is thus necessarily short-term as no politician dares care what transpires a decade or two hence.

As a result, politicians must favor inflation, which enables them to borrow/print money and distribute it as swag to voters and Elites ("special interests") in the present and pay interest on the new debt with "cheaper" future dollars.

2. Voters possess the built-in human bias for present gain over future gain. Thus future insolvency is meaningless to those demanding State largesse in the present.

Indeed, politicians have noted that those who demand sacrifice in the present to address a long-term crisis lose elections while those who distribute swag while ignoring the gathering storm on the horizon win elections.

3. Inflation is thus "good" for politicians and the State as it enables paying off obligations assumed in the present with devalued future currency. But is it "good" for the voters who actually earn income? Is a policy which robs a third of your money every decade a worthy policy? For that is precisely what "low" inflation of 2.5-3% annually does: it reduces your dollars' values by a third every decade.

Will the swag "given" to you (is it "given" when it's your own future earnings?) now in the form of government benefits and tax cuts add up to more than a third of your future earnings over a decade? Unlikely, to say the least.

4. So politicians exploit the human bias for short-term gain even as they rob the taxpayers via inflation over the long term. Inflation is tolerable as long as you're a wage earner and your income rises at the same rate as inflation.

But income from labor (wages/salaries) have been flat since the early 70s for most Americans, and so inflation has only been "good" for those holding assets which have risen more or less in lockstep with inflation.

For those whose earnings rise nominally by 15% a decade while inflation robs 30% of their purchasing power, then "a little inflation" is a long-term disaster.

5. The usual argument in favor of inflation is debt-based. That is, inflation is wonderful because it enable us to pay off our debts with future "cheaper" dollars. But if our incomes are being robbed by inflation, then is that "benefit" of inflation really so valuable? If I lose a third of my purchasing power in a decade does being able to pay down my mortgage with depreciated dollars offset my loss of purchasing power? No--unless my mortgage payment exceeds my income by a fair margin, which is essentially impossible.

6. Deflation is excellent for those with cash and earnings and awful for kleptocracy governments and those with over-leveraged debt. The entire idea that "inflation is good" masks a perverse incentive: take on as much debt as you possibly can because interest will become "cheaper" to pay in the future (assuming your earnings keep up with inflation).

If your earnings don't keep up with inflation, well, too bad.

7. The government's "earnings" are tax revenues. As profits and incomes have fallen, so have tax revenues. So as the purchasing power of its taxpayers' wages are stolen via inflation--"theft by other means"--then the State's ability to collect ever-larger sums of money via taxes is crimped. Unless, of course, the government can create asset bubbles via loose credit and unlimited liquidity which then generate huge capital gains which can then be taxed.

8. To enable distribution of swag to voters and Elites, the State kleptocracy offloads the payments into the future. By creating inflation then the State guarantees (or so it reckons) that it will be able to pay the interest on that debt with "cheaper" money collected from taxpayers in the future.

But as taxpayers find the purchasing power of their earnings declining (theft by other means) then they respond to the incentives presented by the government: borrow to the hilt and speculate in asset bubbles as the only way left to maintain purchasing power.

This dependence by both State and citizenry on asset bubbles to maintain purchasing power leads to over-leverage and over-indebtedness which then leads inevitably to a collapse of asset values (which were based on exponential credit expansion) and the tax revenues which were dependent on asset bubbles.

Now the taxpayers find their post-bubble assets decimated and their purchasing power diminished while government finds its tax revenue base has been gutted. Paying interest on all that debt while distributing unlimited swag was predicated on rising tax revenues. That plan has now been revealed as fantasy.

Interestingly, the original Constitution did not explicitly grant powers of conscription or monetary debasement. Yet the vaunted "balance of powers" has not impeded the State from concentrating monetary powers in order to reward Elites and steal not just from its present citizens but from its future citizens.

But even the State cannot control the cycle of over-indebtedness, collapsing asset values and the impoverishment of its people via inflation. The end-state is insolvency, and as the State's monopolies fail to sustain the status quo then its various Elites will battle each other for the remaining spoils: what I term internecine conflict between protected fiefdoms.

The above was excerpted from Survival+: Structuring Prosperity for Yourself and the Nation.

NOTE: Thank you to everyone who wrote me and/or contributed to the site in the past 12 days; I will be unable to return to my normal routine for a few more days. Your patience is much-appreciated.

Permanent link: The Grand Failure of Government to Limit Concentration of Power

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Michael H. ($15), for your very generous contributions of cash and ideas to this site. I am greatly honored by your support and readership.

Thanksgiving

noreply@blogger.com (Charles Hugh Smith) — Thu, 26 Nov 2009 05:20:00 +0000

Thanks to you, readers and contributors, I have much to be thankful for.

To all who took the time to give me encouragement via words and financial contributions-- thank you very much. Once I return to a broadband connection I will thank each of you individually. Until then, please accept this expression of gratitude in the spirit of Thanksgiving.

As longtime readers know, this blog is highly dependent on readers for content, topics and inspiration. It is truly "of two minds"--yours and mine, with the understanding that I merely add to/organize what readers provide.

I have to say that the many emails I have received the past week have reawakened my purpose--to present the coming Transformation/collapse of the debt-dependent, consumerist status quo as a positive rather than a negative transformation (as if opting out of debt-serfdom could be negative).

It is only negative to the Power Elites who will find their share of the national/global income and political power diminished. For the rest of us, no matter how jarring and uncomfortable the Transformation may be at first, it is fundamentally positive in being much more sustainable, much healthier and much less of a burden to our children and grandchildren--something the wildly misguided pundits like Paul Krugman never mention ("go ahead and borrow and blow another trillion dollars or even 10 trillion to keep the consumerist debt machine cranking--we don't care about anything but next quarter's GDP being 'positive' (whatever ills are masked we don't care, just as long as it's a carefully manipulated 'positive number.'")

I am honored and humbled by your encouragement, and I feel the project you are supporting-- a positive, grounded, non-propaganda view of the future--is worthy of all the effort I can devote to it.

For that I am profoundly thankful.

This Thanksgiving, I will be thinking of all the citizens serving in the U.S. Armed Forces posted in distant lands. I honor their service even as I question the politics that has placed them in harm's way far from the homeland. Each uniformed person deserves our thoughts and gratitude this Thanksgiving, and for those uniformed and retired service members who read this blog--and there are many-- thank you for your service. We need your involvement in the body politic to ground the American people in what is being done in their name and with their money.

I wish you all a safe Thanksgiving holiday.

Permanent link: Will Commercial Real Estate Trigger a Double-Dip Recession?

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Tom U. ($100), for your stunningly generous contribution to this site. I am greatly honored by your support and readership.

Will Commercial Real Estate Trigger a Double-Dip Recession?

noreply@blogger.com (Charles Hugh Smith) — Tue, 24 Nov 2009 17:11:00 +0000

That commercial real estate (CRE) is careening off a cliff is already a given. The consequences of wealth/debt destruction have yet to be tallied.

Just in case you missed the dozens of recent stories describing the complete meltdown in commercial real estate in the U.S., here are several accounts of the grim realities:

Commerical Real Estate and REITs - It's About That Time, again...

Commercial Real Estate Investors Turn More Gloomy

Southern California's vast desolation indoors Almost 51 million square feet of office space is vacant in Southland, and that number is expected to continue growing well into next year

The general context is well-presented in this WSJ.com story. stripped of the usual angst--"who could have seen this coming?" etc.-- CRE is just another bubble inflated by liquidity, leverage and la-la land cash flow projections that has finally blown up. Prices are down 40% from their peaks and vacancies are soaring.

Fears of a New Bubble as Cash Pours In Real-Estate, Stock and Currency Markets, Especially in Asia and Pacific, Are Seen at Risk

Very few analysts seem to have pondered the consequences of the CRE implosion, other than to note losses will be at least $500 billion. We should recall that consensus estimates of residential real estate losses were laughably low, as were estimates of jobs expected to be lost in this recession-- 2.3 million versus the reality of 7.3 million plus millions more full-time positions cut to part-time. That's more than three times the standard-issue financial pundits' projections.

So why would their estimates of CRE losses be any more realistic than their estimates for residential and job losses? Thus we can anticipate (just on general principle) that estimates of losses are gross underestimates of what will actually transpire.

It seems "obvious" that one likely outcome of horrific losses to owners and banks in the CRE implosion is a return to recession--the dreaded "double-dip recession." I have sketched out how the dominoes might fall in this graphic:

The Fed's balance sheet already exceeds $2 trillion, Treasury is selling nearly $2 trillion in bonds every year (to finance $1.5 trillion deficits and Treasuries which must be rolled over), the government and Fed have already spent $1.2 trillion propping up the residential mortgage market (99% Federal government guaranteed/underwritten) and countless billions bailing out Fannie, Freddie, AIG, etc. etc. etc.

Does anyone seriously believe the public and bond market will welcome another trillion-dollar bailout of banks and corporations which made visibly risky overleveraged bets on absurdly overpriced CRE properties?

If gthe bond market doesn't puke at the prospect of another $1 trillion borrowed and thrown down the black hole of "saving our financial system" (barf), then the public may well finally step up to the plate.

The prospect of more job losses is sobering, mind-numbing, and terrible. Yet as I noted earlier this week, the reality is the economy has millions of jobs which are hanging by threads due to declining income, revenues and spending. Most of these jobs are retail or white-collar positions which will directly impact CRE. As stores close, the owners are stiuck with zero cash flow and very few prospects for new tenants. As businesses downsize, they move to smaller offices and leave the owners with more inventory.

The ultimate losers of the $1 trillion will be the banks which lent $230 million for properties supposedly worth $250 million at the top which are now worth $125 million at best.

How many banks will fold as CRE implodes? the number is unknown, but what we do know is there will be increasingly shrill demands for a "new bailout of troibled banks" and that the taxpayer will be the source of the money--via another trillion dollars borrowed and blown by the Federal government and the Fed.

The current optimism is based on the idea that "the worst is over." As CRE melts down and hundreds of billions of losses are accrued, as more banks fold, as the government rushes to bail out more players who deserve to be liquidated, then the fragile psychology will reverse.

Permanent link: Will Commercial Real Estate Trigger a Double-Dip Recession?

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Richard M. ($20), for your much-appreciated generous contribution from the U.K. to this site. I am greatly honored by your support and readership.

The Fantasy of an Export-Led Recovery

noreply@blogger.com (Charles Hugh Smith) — Wed, 18 Nov 2009 13:04:00 +0000

Official propaganda has shifted to promoting the notion that America's future growth will come from exports. The idea is pure fantasy.

It seems the Obama administration has just fallen in love with the same dream the rest of the world has been pursuing for decades: export your way out of recession.

But the dream runs into a number of profound problems, as outlined in this article:Can the Future Be Built in America?(BusinessWeek):

From its headquarters in a modest office park outside Sunnyvale, Calif., Bridgelux is hoping to spark a revolution in light fixtures for homes and offices across the U.S. It's ready to ramp up production of tiny light-emitting chips that blaze as bright as some incandescent bulbs but consume a fraction of the energy. To meet surging orders for its chips, it's prepared to spend $250 million over three years on gleaming cleanrooms. The question is, where should it put its plants?
For a host of strategic reasons, Bridgelux would like to keep manufacturing in the U.S., but financial realities point to Asia. Not only are taxes far lower and government incentives more generous in such nations as Malaysia, China, and Singapore, but it's easier to raise cheap funding offshore than in the U.S., where private investors frown on manufacturing and bank lending is nearly frozen. CEO Mark Swoboda calls the decision "the toughest challenge facing our company."

Take a look at this chart from the article. In a period of non-financial-based prosperity, the late 1990s, then manufacturing growth clearly powered the economy's expansion.

As unbelievable as it sounds now, 3COM modems and other gear were manufactured in the midwest in 1997.

The "prosperity" of the 2000s was clearly not led by making anything; it was all financial gaming, leverage, and speculation. This chart tells the story:

There are several fundamental reasons why an export-led recovery is unfortunately a fantasy.

1. Where does Washington think our foreign customers will get the money to buy manufactured goods from us? The major trading blocs/nations--the EU, Japan, China and Southeast Asia--are all merchantilist economies--they all depend on selling to us (consumers of last resort) to generate their national surplus income.

If we slash our purchases of their goods, their economies go into a tailspin and their residents won't have surplus income to buy anyone else's goods--or their own. This is the fundamental flaw in the endlessly repeated canard that "these exporting nations need to encourage their own domestic consumption." Yeah, and how do they do that? By firing all the people making stuff for export to the U.S.? Without exports, their national surplus vanishes and their people lose jobs and income. That is hardly the foundation for "more domestic consumption."

The only way we can hope to pursue the same model as all our global competitors is to devalue the dollar to such a degree that U.S.-made goods (priced in other currencies) will be so incredibly cheap that non-U.S. buyers will be compelled to buy U.S. goods by price alone.

But if the dollar falls in half, then our imports of all those nations' goods will also collapse, pushing their economies into deep recession. It is indeed a conundrum: if we cut imports then we deprive our potential buyers of the very funds they need to buy our goods.

Collapsing the dollar has all sorts of other pernicious side effects, too. What happens to the price of imported oil of the dollar is cut in half? It doubles. What effect will that have on the domestic U.S. economy?

Will all the nations pursuing an "export or die" strategy of national economic growth stand by idly while the dollar weakens and their own currencies are driven up to the point that Americans can no longer afford their goods?

Of course not; we are already witnessing a "race to tthe bottom" as every nation and trading bloc attempts to lower its currency to keep its flagging export machine running.

Even worse from the U.S. point of view, destroying the value of the dollar in an attempt to boost exports fails to take into account that the Chinese peg their renminbi to the dollar. So as the dollar drops, so does the renminbi (yuan). The net result is Chinese goods remain cheap to U.S. consumers regardless of how low the dollar goes.

2. Exports are around 6-7% of the U.S. economy. Even a stupendous 20% increase, as welcome as that would be, would register as a blip in the overall GDP.

3. The supply chain necessary to complex manufacturing has moved overseas. As theBusinessWeek article explains, getting a big fat tax credit for a new factory in the U.S. is only step one: you need a supply chain of components and partners. If that has migrated overseas, then you need to either outsource the overseas components (in which case why assemble anything here?) or re-invent a new supply chain here--an expensive and risky proposition.

4. Though Americans love to give lip service to manufacturing, local government and those living nearby don't like it; thay all want "clean industries" like making movies ($10 billion in a $14 trillion economy--good luck with that) or that wonderful FIRE economy (finance, insurance and real estate) which generates billions of dollars from nice clean office parks and towers.

Except when it doesn't.

5. Those touting manufacturing as a "jobs" engine must not have actually toured many factories. To compete globally, any new factory in the U.S. has to be heavily mechanized and automated. A typical factory might have a few dozen employees tending the robots and software. Even a large factory might employ fewer than 200 workers.

Pundits who talk about "manufacturing" should spend a day working in an old-fashioned assembly line (if any still exist in the U.S.), putting one part in the same place all day long. It is mind-numbing work and that aspect is always passed over in the bloodless cheerleading by those who have no idea how a semiconductor factory (for instance) actually functions.

Even in China, manufacturing is inevitably becoming more automated. That has been "the future" for decades and it remains the future.

6. The cost of doing business in the U.S. is prohibitve and getting more so with each passing day. Healthcare costs rise 6% every year, 25% every four years, regardless of whether Tweedledum or Tweedledee runs Washington or if the economy is growing or shrinking. Every level of government is a sclerotic bureaucracy which makes starting a business a costly, risk-laden challenge.

The prevailing attitude is that private enterprise's money "should" flow to government like water flows to the sea, and small business "should" soldier on, paying taxes and making payroll, regardless of how bad the economy gets or how onerous the junk fees and taxes become.

As I have long noted, small business (the engine of the economy) has a choice--it can opt out, quit, close its doors. The reasons to do so pile higher every day. Once again, Americans love to pontificate about how much they value small business, even as their governments make doing business a losing proposition.

For all these reasons, we should be wary of claims that the U.S. can "grow its way out of recession" on the back of a newly energized manufacturing/export sector and replace the failed "debt-based consumption" model of "growth" with a new one based on exports of manufacturing.

It isn't that easy.

Permanent link: The Fantasy of an Export-Led Recovery

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Eileen A. ($5), for your most welcome generous donation to this site. I am greatly honored by your support and readership.

The Next 7 Millions Jobs That Will Be Lost

noreply@blogger.com (Charles Hugh Smith) — Tue, 17 Nov 2009 14:40:00 +0000

The hype is that the "recession is over." Has anyone touting this line actually walked around the real world? The next 7 million jobs to be lost are already in the pipeline.

The divergence between the reality easily observed in the real world and the heavily touted hype that "the recession is over because GDP rose 3.5%" is growing. It's obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.

According to the latest Employment Situation Summary (Bureau of Labor Statistics) dated November 7, 2009:

Total nonfarm payroll employment declined by 190,000 in October. In the most recent 3 months, job losses have averaged 188,000 per month, compared with losses averaging 357,000 during the prior 3 months. In contrast, losses averaged 645,000 per month from November 2008 to April 2009. Since December 2007, payroll employment has fallen by 7.3 million.
Civilian labor force: 154 million
Employment: 138.3 million
Unemployment: 15.7 million
Sept-Oct. change in employment: -589,000
in unemployment: 558,000
Not in labor force: 82,575,000

It is staggering that 7 million jobs lost out of 145 million (the total prior to the financial meltdown) has created a 10.2% unemployment rate. The numbers here don't add up--"only" 190,000 jobs were lost in October, but then employment fell by 589,000--huh?--but the point missing is how many jobs are hanging by a thread.

I recently traveled to Los Angeles to be interviewed by my polymath friend and media maven Richard Metzger, creator of the Dangerous Minds website which has rocketed to 50,000 page views a day since he launched it a few months ago. (The topic was of course Survival+; look for the interview in about a week on Dangerous Minds.)

(Richard also manages the L.A. Time's hot blog Brand X which will have you humming Randy Neuman's I Love L.A. in short order.)

Has anyone noticed that airports are commercial dead-zones peopled by zombie clerks suffering from terminal boredom?

One desperate young man had taken the unenviable job of hawking Chase credit cards via a weak pitch for a free ticket on Southwest Air (retail value $59). Since I like to arrive early for flights (perhaps scar-tissue remaining from being on TSA's "watch list" for months on end, and almost missing flights as a result--"papers, please!") I was able to observe hundreds of travelers stream by the young man's kiosk while he gamely voiced the pitch. Not one person even paused, much less stopped.

Translation: Up yours, Chase credit cards.

How many of these dead-zone airport retail kiosks will go dark next year?

The See's Candy kiosk: bored clerk rearranging pricey boxes of candy, no customers. Ditto the sunglasses kiosk, and every retail outlet except Starbucks, which was moving plain coffee and the pizza/beer establishment which did a brisk business around 7-8 p.m. with the "heading home Sunday evening" crowd.

(Richard and I had picked up some excellent Chicken Tikka Masala from a small indian market on Pico Blvd., so I wasn't tempted.)

I rented a brand-new 4-door Ford Focus--a nice car with plenty of zip--for $24 total, including all the ripoff airport and State of California taxes, with unlimited miles. $24 for all day, including all the new junk fees added to car rentals? Deal!

The red Mustang sat in the rental lot, a rather sad icon, while the cheapest compacts were rented and driven off the lot. What does that say?

Arriving early at the studio (natch), I had time to wander down one of the premiere open-air retail malls in the nation, the Promenade in Santa Monica (town of my birth, heh, though I never lived there). Other than one or two Asian tourists, no one carried a shopping bag of any size or type. This was noon on Sunday, a busy shopping day, and nobody was buying anything. Barney's Beanery was doing a good business but most other dining establishments were crypts.

Sauntering down blocks of America's standard-issue mall outlets--J. Crew, Apple, Pottery Barn, etc. etc.--the stores were empty though the sidewalks were busy.

Victoria's Secret was promoting 7 panties for $21--how much profit can VS rake in selling 7 panties for $21?--and the store was empty. Even the Apple store was a morgue.

Bored waiters were leaning on sidewalk cafe railings, and a few employees were sitting outside talking with their friends--tip-off--no drinks, no food, the table was bare.

OK, here's the money shot. Recall for a split second I am a writer (for better or worse) and so my "job" is to observe people closely (22 years free-lancing, man, am I dumb to keep doing this!).

So a tres-chic young Caucasian woman with two adorable kids around 7 to 9 years of age pauses a few yards from me. The woman has the casually tony attire and slim figure of someone who either is a well-educated professional pulling down major dollars or someone whose spouse is pulling down major dollars in some yuppie gig (or both spouses are doing so).

The yuppie Mom pulls her wallet out of her upscale little purse as the two kids gather round and I am thinking, "She's going to give each kid a Jackson ($20) or at least a fiver just to blow on whatever strikes their fancy."

This is, after all, Santa Monica on a Sunday, and this is a yuppie Mom with the bucks to pay for high-end casual attire, hair coloring, personal trainer, gym membership, etc.

After digging around a bit, she extracts two pennies which she gives to her kids to toss into the water feature/fountain nearby.

I think this rather neatly summarizes the entire U.S. consumer and the future of the economy.

Doesn't anyone follow the threads of what is easily observable anywhere in America?

Consider for a moment one of the few businesses licensed to print money--towing companies with city contracts. What are the odds that these towing outfits are towing cars which no one ever claims? Heck, with tickets, towing and storage fees, the cost of reclaiming your vehicle can run into the hundreds of dollars in a mere day or two.

That is more than many vehicles are worth. So what's the net result? the towing companies' lots will soon be filling with junkers and their revenues will be falling as down-and-out citizens abandon their vehicles because they don't have the money to get them un-impounded.

Net-net, when the towing company's revenues fall then somebody's hours or job gets cut.

About once a month I take my Mom out to dinner in San Francisco, "the most European city in America" and a favorite city for those with disposable income. The city contains approximately three restaurants per resident (slight exaggeration) with a Michelin one-star establishment (i.e. excellent, superb, etc.) about every block in the better neighborhoods.

Yes, it is a splurge, but it's my Mom and it's our "quality time." So we chat with the waiters and waitresses, and on opera nights and the like, business is so good it seems impossible the word "recession" is even being bandied about.

But when it's slow, it's dead. It seems almost random, which nights are busy and which are slow, but the net result is far from random. A couple of places that we occasionally frequented a mere year ago are now dark.

A friend of ours has been trying to sell an investment house in a highly desirable zip code in a San Francisco Bay Area suburb. Built perhaps a decade ago, the house would have fetched $800,000 in a heartbeat in 2006, and our friend rejected an offer of $550,000 a year ago as absurdly low. This is after he spent a lot of money having the home repainted in and out, new cabinet doors installed, new carpeting, etc.

That was the only offer the property has received in over a year. Needless to say, maintaining the mortgage is killing him financially.

How many hundreds of thousands of families are in the same situation?

The Honolulu Symphony, which I enjoyed occasionally when I lived on Oahu, recently declared bankruptcy. How many other non-profit arts, theater and community groups are hanging by a thread? Hundreds, if not thousands.

Put together the anecdotal evidence and the next 7 million jobs to be lost are already in the pipeline. I could go on and on about the small businesses whose owners are preparing to close "if things don't pick up a big way soon" and all the other signs that a new wave of massive job losses is rising. But you know that already if you've walked around with your eyes open.

Permanent link: The Next 7 Millions Jobs That Will Be Lost

Get Survival+: Structuring Prosperity for Yourself and the Nation on amazon.com or in ebook and Kindle formats. A 20% discount is available from the publisher.

Expanded free eBook now available (85,300 words, 136 pages):
in HTML: Survival+ in PDF: Survival+

NOTE: the Kindle reader for PCs is now available for free which means you canread the Kindle version of Survival+ on your PC.

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

Thank you, Dwayne L. ($25), for your stupendously generous second donation to this site. I am greatly honored by your support and readership.